February 18, 2008 - The subprime lending crisis has generated a rush to finger-pointing within the lending industry. Many banks have tried to blame brokers, saying that they often lied on loan applications and steered consumers into higher priced loan products to increase their commissions. Now, some banks are trying to blame Fair Isaac's FICO credit score for the problem. Much like FICO scores themselves, neither argument is worth the paper they are written on.

If you are looking for someone to blame for the nations subprime woes, look no further than the lenders themselves. While lenders are certainly not the only participants in the market, they are the ones that created all of the lending products that have led to the current crisis. Furthermore, lenders are the ones that created the commission system which rewarded brokers for making bad loans. So who's really to blame?

Well, now some lenders are starting to blame FICO scores. These are the most commonly used credit scores within the lending industry.

FICO scores are derived through a complex formula. Many people think that they only take into account whether or not you pay your bills on time. But they include much more information.

FICO scores take into account a variety of information including payment history, where you work, how much money you owe and how much credit you have. ACCESS has argued for years that FICO scores don't work. There are a variety of reasons for this, including the fact that 79% of credit reports contain inaccurate information. By default, this means that 79% of FICO scores are concocted from inaccurate data. The situation is actually far more complex, but this argument alone should give you a pretty good idea of how easy it is to shoot holes in any argument in favor of credit scoring.

But this isn't stopping lenders from trying to alleviate their culpability in the subprime crisis by focusing attention on FICO scores. "I think FICO did break down," Washington Mutual executive David Beck told a June finance conference. And In December, CIBC analyst Meredith Whitney wrote in a research paper: "FICO scores, the long-trusted gauge for lenders in determining risk and price, will prove virtually meaningless in this credit cycle."

But why? How is it that lenders can say that credit scoring works most of the time but that it didn't work this time? The argument should be that since credit scores didn't work this time, they shouldn't be relied upon at any time.

Well, the lenders may be cooking their own goose with their current argument. Over the past seven years, lenders introduced a variety of lending products. Among these were products that allowed borrowers to say what their income was without providing any proof. They also allowed borrowers to say what they were worth without providing any proof. These loan products are called Stated Income - Stated Asset loans. They became known within the industry as Liars Loans.

Lenders know that you can have a good credit score with relatively low income and very few assets. This was common knowledge long before the current financial crisis materialized. But why let little things like income and assets affect the amount of money consumers can borrow? That was the attitude of most lenders, and it is now coming back to bite them. So they are trying to blame Fair Isaac's FICO score.

Again, ACCESS will tell you that FICO scores are worthless. Even so, it was the lenders and not Fair Isaac that created our current financial mess. And no amount of finger pointing is going to change this.

by Jim Malmberg

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