Twenty or so years ago Experian and FairIsaac were paid by USAID to help build credit bureau infrastructure in Kazakhstan.
USAID also paid their legal departments to help draft a law which would govern the whole process.
And guess what, in the result we got much fairer, more efficient, far more future-proof infra than the US has today.
Gov licenses credit bureaus and runs its own one.
Banks must report to all licensed bureaus and may choose which bureau to pull reports from. This means a report from any bureau is as good as from any other one.
Having a gov player in the market effectively creates a price ceiling, so a private bureau has to sell data for less than the government-run bureau.
Private bureau has to keep innovating to justify its existence and thus keep creating new products which predict creditworthiness better and better.
Credit report includes all the raw information, so banks are free to compute their own score and are not bound to anything stupidly archaic and awkward such as US FICO score, don't need to rely on any external score at all.
It is the XXI century, computing a credit decision out of a few hundred datapoints takes milliseconds, costs nothing.
So gov-run bureau sees a fraction of a % of the load yet effectively moderates the whole market.
The largest private bureau is owned by banks (like VISA used to be) and thus is working in the best interests of the banks.
Many (if not all) problems we see in the US financial sector are the result of regulatory and legislative negligence. Just some lazy folks trying to run things the way there were in the 80es.
A lot of things in the US would change for the better if we installed a new government for ourselves using the techniques we have when we assist or replace foreign governments.
There’s a ton of stuff we have and do, including some fundamental stuff (our system of voting, for one) that’s known to be really bad compared to the “state of the art”. But, in part because of some of those bad elements, we only ever get to apply better solutions for others, never ourselves.
I think the idea is in good spirit, but it's important to be aware that gov backed services often run at a loss indefinitely. It's impossible to compete with a business that doesn't need to make money to exist. So you end up with just the government service.
> Even if a lender thinks the customer would be a good risk, the lender has to buy a FICO score regardless.
This isn't completely correct. For a period I had no FICO score, yet I was able to secure a loan from a Credit Union. It did require me to show my assets and income flow, but the Credit Union was able to provide me with a loan.
The score from what I have gathered when I learn really rewards those who remain in debt and pay substantial interest, not the frugal and financially stable (check to check is not financially stable). Basically encouraging to keep self in debt just at the edge of financial disaster's precipice.
> ... FICO prohibits not only validating different models against FICO scores, but even displaying FICO scores next to non-FICO scores. ...
> ... all three bureaus plus FICO have massive pricing power.
> ... come to a set of arrangements to jointly hike prices
This cartel will never be broken up. Too much money goes into the politicians pockets to move for break-up.
> For a period I had no FICO score, yet I was able to secure a loan from a Credit Union.
The credit union was content to use its own capital and hold your loan to maturity on its books. (I'm presuming you were probably a banking customer of the credit union, though I realize not necessarily.)
Non-credit union lenders though most often want to either sell your loan to investors or pledge it as collateral to borrow money for themselves, and for that they need a FICO.
> The score from what I have gathered when I learn really rewards those who remain in debt and pay substantial interest, not the frugal and financially stable (check to check is not financially stable). Basically encouraging to keep self in debt just at the edge of financial disaster's precipice.
That's not really true. Using a credit card for most of your expenses and paying it off in full every month is actually a great boost to your credit score. It's both an indication that you live within your means and you honor your agreements.
Most government securitized backed mortgage loans (which has 70% of the market) require a credit pull. Private or direct lending can have a different set of lending standards. From FNMA...
>Credit scores are required for most loans purchased or securitized by Fannie Mae. The classic FICO credit score is produced from software developed by Fair Isaac Corporation and is available from the three major credit repositories. Fannie Mae requires the following versions of the classic FICO score for both DU and manually underwritten mortgage loans:
Equifax Beacon® 5.0;
Experian®/Fair Isaac Risk Model V2SM; and
TransUnion FICO® Risk Score, Classic 04.
>The score from what I have gathered when I learn really rewards those who remain in debt and pay substantial interest,
Way back when, getting my first credit card was difficult--although there are a lot more credit options today.
But, at some point, you absolutely do not need to be in debt to have a good credit score. I guess technically, if you use credit cards and pay them off every month without paying any interest, you're in debt all the time but that's not what most people mean by "debt."
I guess from a certain point of view you're right, a credit score is a list of all the debts you've had an how you've paid them back.
So somebody with no debt is "unknown", rather than the expected "good".
In Finland we don't have credit scores, instead we allow looking up defaults. Which seems like a reasonably sane approach - known-bad borrowers find it hard to repeat that behaviour, and somebody with no history of taking loans/debts isn't penalized.
Right. There is certainly a component of risk in the models but there’s also “how valuable a credit consumer are you”.
Which is why things like closing accounts or paying loans early actually hurt your score. CRAs and their advocates say “we lost a datapoint so our uncertainty increases”, acting as if that historical data has no value.
When I was applying for a mortgage and my credit was as “clean” as it has been (balances, accounts, etc.) Verizon filed a collection over what was a fraudulent account. Score dropped 140 points. In the course of three business days that collection was deleted, and my score went back up… 50 points.
Multiple factors, I know, but that also makes me think that even some of those deleted trade lines and delinquencies and others are still floating around and factoring in.
I would point out that "400% increase in mortgage credit check fees" sounds probably a lot worse than the actual number - which is like.. $150 at the time you are getting a mortgage. Of all the fees associated with buying your average $400k home, I don't think the $150 credit check fee is the big pain point.
Title insurance is a much bigger scam/cost. The various state & local taxes at closing are orders of magnitude higher. Not to mention brokers fees (which are somewhat being handled as of late).
Title insurance could be safely eliminated with something called the Torrens title system, it was tried in the US but never took off outside of Guam. The issue comes from the lack of any definitive record of property ownership, raising the possibility that challenges may be raised in court in the future that weren't known to the buyer.
I wouldn't cut out Title insurance, I have two friends for whom it saved low 7 digits each due to fraud in one case and liens in another.
It's incredibly important in today's market and I can't see how you can call it a scam, unless you also view car/health/life insurance as a scam as well, in which case we just disagree:)
There was another recent article here on cartels that suck small amounts of blood from lots of people. Too small for anyone to individually care but collectively a lot!
What’s particularly insulting is that credit scores are commoditized - they are free to go check. Technically it’s vantage score vs FICO but generally the same and definitely not worth $150.
There is an interesting dynamic here, one government agency, the FHFA, dictates that mortgage brokers have to use FICO and all three major credit bureaus, explicitly granting these companies a government enforced monopoly. Another government agency with different goals, the CFPB, comes in and complains about the price these government granted monopolies are charging and proposes regulation to limit it.
These dueling agencies may eventually find a balance, with the FHFA dictating which companies services have to be used and the CFPB dictating how much those services can charge...
The whole thing is a failure not of free markets but of different government regulators not coordinating their regulations.
If you think this is a "capitalists being evil" problem and not an "regulators over-regulating" problem, you should pay particular attention to fragments of the article:
> It’s not that hard to come up with a model for underwriting that is reasonably accurate; any bank with scale could probably do it. But FICO uses trade secrets, copyright, patents, or restrictive contracts to block anyone from doing so.
> First, the government guarantees most mortgages through Fannie Mae and Freddie Mac [...]. This complex process relies on a standard to price the loans, and that standard is FICO,
> A few years ago, the Federal Housing Finance Agency (FHFA), which runs most housing finance for the government through its control of secondary mortgage buyers Fannie Mae and Freddie Mac, decided that it might want to create some competition for FICO. So it turned to VantageScore. Only, it got backlash from Wall Street, which didn’t want to bother changing their models for mortgage backed securities.
Instead of allowing mortgage lenders to pick either FICO or VantageScore, FHFA simply required that lenders use both.
In short, the federal government essentially requires everybody to use the services of one specific private company. This company can raise prices not because it's anticompetitive, but because the government doesn't allow it to have any competition.
Perhaps, instead of trying to pass even more regulation, that government should just relax its restrictions and allow other participants on the market to compete fairly?
I don't think the solution is less regulation. When you let the banks play fast and loose with the rules, they will. See 2008.
The real answer is an open source credit model. We don't need a black box. Let private industry handle the credit line qctivity reporting part like they do now and just feed that info into an open source model. Done.
The capitalists regularly lobby government to destroy their competition and make holes in regulations that would cause major disruptions to their business models. The light truck exemption to CAFE rules is a great example.
seems like a startup opportunity - start with a well-defined subset of consumers where you can beat FICO in accuracy, then expand out. Don't compete on price, win on detail and quality.
> FICO prohibits not only validating different models against FICO scores, but even displaying FICO scores next to non-FICO scores.
The problem is that your competition is engaged in anti-competitive practices. Any bank can make an underwriting model, and the large banks already have enough data to pull it off. They haven’t done it, and they won’t do it because the agreements they’ve made with FICO makes implementing that impossible and Government agencies require FICO.
If a startup wants to change this, they better get real good at lobbying because government policy is the biggest constraint.
It's not that simple; you are effectively required to use FICO if you're participating in the "normal" mortgage market due to government regulations.
From TFA:
>Even if a lender thinks the customer would be a good risk, the lender has to buy a FICO score regardless. Mortgage bankers don’t carry the capital to hold the mortgages they make. Instead they make a loan, and then send it onward to the capital markets. First, the government guarantees most mortgages through Fannie Mae and Freddie Mac as well as other programs for veterans and first time homebuyers. Then, the government in turn sends these guaranteed mortgages to Wall Street. This complex process relies on a standard to price the loans, and that standard is FICO, combined with the credit information from the three bureaus.
Doesn't matter how accurate or inaccurate it is, if you're selling to Fannie Mae or Freddie Mac (which is the majority of mortgages) you HAVE to use FICO.
"In 2006, the three credit bureaus decided they were tired of FICO’s position in the industry, and created a rival, called VantageScore, offering credit ratings for much cheaper than FICO"
...
"A few years ago, the Federal Housing Finance Agency (FHFA), which runs most housing finance for the government through its control of secondary mortgage buyers Fannie Mae and Freddie Mac, decided that it might want to create some competition for FICO. So it turned to VantageScore ... Instead of allowing mortgage lenders to pick either FICO or VantageScore, FHFA simply required that lenders use both. So now, instead of having to deal with one monopoly, mortgage lenders will have to deal with two"
This is not a market problem, or a technical problem. The problem here is the US federal government.
Well the problem is that anti-"discrimination" laws will kill that startup if that "well defined subset of consumers" doesn't have enough black people.
Same reason IQ tests are banned and credit scores are only allowed to consider like 7 factors.
Lenders have to request a credit score from one of these agencies, because that's what Fannie Mae and Freddie Mac require.
This is about regulatory capture, which is of course entirely within the control of the regulators, and very indirectly by voters at the ballot box. We continue to vote for politician who allow this to continue.
We can't be taken advantage of without our (collective) permission. Let's vote for some folks that remove the regulatory capture and free up lenders (really loan originators, of which there are a great many) to compete for borrowers by (in some cases) dispensing with the credit score and other items.
> In other words, national credit reports are foundational to modern American society, binding us to one another financially as a nation through a network of computerized records. And that national market of identity is relatively new. Until 1970, credit reporting was localized, mostly through coops of town bankers who hired detectives to investigate borrowers, collecting gossip from snitches about who drank too much, who was a Communist, who slept around, and so forth.
The ridiculous thing is that the FICO score is so focused on commercial profitability rather than risk. You get lower score if you as a consumer optimise your cost of credit, price shopping/taking advantage of new rates/offers… it’s really a credit and likely profitability score
I have an 800 score while always being tight with my wallet.
The most valuable thing to lenders is someone who can 100% be counted on to always pay, even if things outside their control turn against them. People chronically fail to understand this, and end up putting themselves in financially precarious situations i.e. paycheck-to-paycheck living.
meh, that's not true. it's easy to have a top score while never paying lenders a dollar in profit. You just have to follow instructions online to juice your accounts by opening the right kinds and using them the right ways (e.g. keeping your usage below a threshold percentage of your limits).
The credit score is essentially price discrimination predicated on customers not being able to find and follow instructions. It also happens to give poor scores to people who are credit risks, but the difference between a meh score and a high one is mostly your ability to munchkin a bit.
I wonder if open source software can play a role in this. Maybe we can have an open source algorithm for determining credit ratings and private companies only provide a secure database of ratings.
It will also offer the lay person insights into how the credit rating is exactly determined. They can know what is causing their rating to be less than desired and take appropriate action, instead of watching a random youtube video titled "5 ways to quickly improve your credit score".
Presumably the reason they have a lower score than desired is because they already failed to do this in one form or another.
> "5 ways to quickly improve your credit score".
Have no inquiries. Have no forced account closures or writeoffs. Have as much total open credit as you can without triggering the first two. Have at least one secured or unsecured installment loan open and then paid off every 5 years. Always pay your bills on time.
It's not quick, I suppose, but the recipe is already pretty well known.
Not only do banks and credit agencies provide a "recipe" for improving your score, most do so free of charge (for existing customers).
For example, I know my score swings by +/-30 points/month. I'm fairly confident that is due to the balance on my CCs varying when the score is calculated (there is nothing else about my financial situation changing - same house for a decade, same car loan for 5 years, no new credit lines/loans, etc). But, I pay the cards off every month, and the score always rebounds.
Aspos|1 year ago
Gov licenses credit bureaus and runs its own one. Banks must report to all licensed bureaus and may choose which bureau to pull reports from. This means a report from any bureau is as good as from any other one.
Having a gov player in the market effectively creates a price ceiling, so a private bureau has to sell data for less than the government-run bureau. Private bureau has to keep innovating to justify its existence and thus keep creating new products which predict creditworthiness better and better. Credit report includes all the raw information, so banks are free to compute their own score and are not bound to anything stupidly archaic and awkward such as US FICO score, don't need to rely on any external score at all. It is the XXI century, computing a credit decision out of a few hundred datapoints takes milliseconds, costs nothing. So gov-run bureau sees a fraction of a % of the load yet effectively moderates the whole market. The largest private bureau is owned by banks (like VISA used to be) and thus is working in the best interests of the banks.
Many (if not all) problems we see in the US financial sector are the result of regulatory and legislative negligence. Just some lazy folks trying to run things the way there were in the 80es.
vundercind|1 year ago
There’s a ton of stuff we have and do, including some fundamental stuff (our system of voting, for one) that’s known to be really bad compared to the “state of the art”. But, in part because of some of those bad elements, we only ever get to apply better solutions for others, never ourselves.
Workaccount2|1 year ago
WaitWaitWha|1 year ago
This isn't completely correct. For a period I had no FICO score, yet I was able to secure a loan from a Credit Union. It did require me to show my assets and income flow, but the Credit Union was able to provide me with a loan.
The score from what I have gathered when I learn really rewards those who remain in debt and pay substantial interest, not the frugal and financially stable (check to check is not financially stable). Basically encouraging to keep self in debt just at the edge of financial disaster's precipice.
> ... FICO prohibits not only validating different models against FICO scores, but even displaying FICO scores next to non-FICO scores. ...
> ... all three bureaus plus FICO have massive pricing power.
> ... come to a set of arrangements to jointly hike prices
This cartel will never be broken up. Too much money goes into the politicians pockets to move for break-up.
JackFr|1 year ago
The credit union was content to use its own capital and hold your loan to maturity on its books. (I'm presuming you were probably a banking customer of the credit union, though I realize not necessarily.)
Non-credit union lenders though most often want to either sell your loan to investors or pledge it as collateral to borrow money for themselves, and for that they need a FICO.
> The score from what I have gathered when I learn really rewards those who remain in debt and pay substantial interest, not the frugal and financially stable (check to check is not financially stable). Basically encouraging to keep self in debt just at the edge of financial disaster's precipice.
That's not really true. Using a credit card for most of your expenses and paying it off in full every month is actually a great boost to your credit score. It's both an indication that you live within your means and you honor your agreements.
hnburnsy|1 year ago
https://selling-guide.fanniemae.com/sel/b3-5.1-01/general-re...
>Credit scores are required for most loans purchased or securitized by Fannie Mae. The classic FICO credit score is produced from software developed by Fair Isaac Corporation and is available from the three major credit repositories. Fannie Mae requires the following versions of the classic FICO score for both DU and manually underwritten mortgage loans:
ghaff|1 year ago
Way back when, getting my first credit card was difficult--although there are a lot more credit options today.
But, at some point, you absolutely do not need to be in debt to have a good credit score. I guess technically, if you use credit cards and pay them off every month without paying any interest, you're in debt all the time but that's not what most people mean by "debt."
stevekemp|1 year ago
So somebody with no debt is "unknown", rather than the expected "good".
In Finland we don't have credit scores, instead we allow looking up defaults. Which seems like a reasonably sane approach - known-bad borrowers find it hard to repeat that behaviour, and somebody with no history of taking loans/debts isn't penalized.
FireBeyond|1 year ago
Which is why things like closing accounts or paying loans early actually hurt your score. CRAs and their advocates say “we lost a datapoint so our uncertainty increases”, acting as if that historical data has no value.
When I was applying for a mortgage and my credit was as “clean” as it has been (balances, accounts, etc.) Verizon filed a collection over what was a fraudulent account. Score dropped 140 points. In the course of three business days that collection was deleted, and my score went back up… 50 points.
Multiple factors, I know, but that also makes me think that even some of those deleted trade lines and delinquencies and others are still floating around and factoring in.
unknown|1 year ago
[deleted]
simfree|1 year ago
For most individuals, building a relationship with a local credit union is an asset in and of itself.
throwaway173738|1 year ago
They said this about Bell Telephone at one time too.
steveBK123|1 year ago
Title insurance is a much bigger scam/cost. The various state & local taxes at closing are orders of magnitude higher. Not to mention brokers fees (which are somewhat being handled as of late).
morpheuskafka|1 year ago
e63f67dd-065b|1 year ago
CPLX|1 year ago
The mortgage companies have to pay it even for applicants that don’t end up actually becoming customers.
chollida1|1 year ago
I wouldn't cut out Title insurance, I have two friends for whom it saved low 7 digits each due to fraud in one case and liens in another.
It's incredibly important in today's market and I can't see how you can call it a scam, unless you also view car/health/life insurance as a scam as well, in which case we just disagree:)
mschuster91|1 year ago
Given the horror stories that crop up regularly on HN or Reddit, these insurances actually make sense.
xivzgrev|1 year ago
There was another recent article here on cartels that suck small amounts of blood from lots of people. Too small for anyone to individually care but collectively a lot!
What’s particularly insulting is that credit scores are commoditized - they are free to go check. Technically it’s vantage score vs FICO but generally the same and definitely not worth $150.
unknown|1 year ago
[deleted]
splwjs|1 year ago
No other figures are consequential. Mortgages are a predatory thing pointed at the financially illiterate and the hopeless right now.
ensignavenger|1 year ago
These dueling agencies may eventually find a balance, with the FHFA dictating which companies services have to be used and the CFPB dictating how much those services can charge...
The whole thing is a failure not of free markets but of different government regulators not coordinating their regulations.
exabrial|1 year ago
* You cannot regulate a monopoly into good behavior. Recent example: Apple.
* You must destroy it.
All of these regulatory bureaus are a waste of time. Let the FTC loose like a Mantura.
BugsJustFindMe|1 year ago
The wind instrument?
miki123211|1 year ago
> It’s not that hard to come up with a model for underwriting that is reasonably accurate; any bank with scale could probably do it. But FICO uses trade secrets, copyright, patents, or restrictive contracts to block anyone from doing so.
> First, the government guarantees most mortgages through Fannie Mae and Freddie Mac [...]. This complex process relies on a standard to price the loans, and that standard is FICO,
> A few years ago, the Federal Housing Finance Agency (FHFA), which runs most housing finance for the government through its control of secondary mortgage buyers Fannie Mae and Freddie Mac, decided that it might want to create some competition for FICO. So it turned to VantageScore. Only, it got backlash from Wall Street, which didn’t want to bother changing their models for mortgage backed securities. Instead of allowing mortgage lenders to pick either FICO or VantageScore, FHFA simply required that lenders use both.
In short, the federal government essentially requires everybody to use the services of one specific private company. This company can raise prices not because it's anticompetitive, but because the government doesn't allow it to have any competition.
Perhaps, instead of trying to pass even more regulation, that government should just relax its restrictions and allow other participants on the market to compete fairly?
idiotsecant|1 year ago
The real answer is an open source credit model. We don't need a black box. Let private industry handle the credit line qctivity reporting part like they do now and just feed that info into an open source model. Done.
chuckadams|1 year ago
¿Por que no los dos? A cartel enshrining itself into law is Regulatory Capture 101.
lenerdenator|1 year ago
asah|1 year ago
vegetablepotpie|1 year ago
The problem is that your competition is engaged in anti-competitive practices. Any bank can make an underwriting model, and the large banks already have enough data to pull it off. They haven’t done it, and they won’t do it because the agreements they’ve made with FICO makes implementing that impossible and Government agencies require FICO.
If a startup wants to change this, they better get real good at lobbying because government policy is the biggest constraint.
astura|1 year ago
From TFA:
>Even if a lender thinks the customer would be a good risk, the lender has to buy a FICO score regardless. Mortgage bankers don’t carry the capital to hold the mortgages they make. Instead they make a loan, and then send it onward to the capital markets. First, the government guarantees most mortgages through Fannie Mae and Freddie Mac as well as other programs for veterans and first time homebuyers. Then, the government in turn sends these guaranteed mortgages to Wall Street. This complex process relies on a standard to price the loans, and that standard is FICO, combined with the credit information from the three bureaus.
Doesn't matter how accurate or inaccurate it is, if you're selling to Fannie Mae or Freddie Mac (which is the majority of mortgages) you HAVE to use FICO.
steveBK123|1 year ago
CPLX|1 year ago
As described in the story the fucking CREDIT BUREAUS themselves were unable to launch a competing scoring model due to monopoly lock in effects.
rufus_foreman|1 year ago
"In 2006, the three credit bureaus decided they were tired of FICO’s position in the industry, and created a rival, called VantageScore, offering credit ratings for much cheaper than FICO"
...
"A few years ago, the Federal Housing Finance Agency (FHFA), which runs most housing finance for the government through its control of secondary mortgage buyers Fannie Mae and Freddie Mac, decided that it might want to create some competition for FICO. So it turned to VantageScore ... Instead of allowing mortgage lenders to pick either FICO or VantageScore, FHFA simply required that lenders use both. So now, instead of having to deal with one monopoly, mortgage lenders will have to deal with two"
This is not a market problem, or a technical problem. The problem here is the US federal government.
tryptophan|1 year ago
Same reason IQ tests are banned and credit scores are only allowed to consider like 7 factors.
hnthrowaway0328|1 year ago
bearjaws|1 year ago
Nifty3929|1 year ago
This is about regulatory capture, which is of course entirely within the control of the regulators, and very indirectly by voters at the ballot box. We continue to vote for politician who allow this to continue.
We can't be taken advantage of without our (collective) permission. Let's vote for some folks that remove the regulatory capture and free up lenders (really loan originators, of which there are a great many) to compete for borrowers by (in some cases) dispensing with the credit score and other items.
kmeisthax|1 year ago
: Wait, it's all social credit?
: Always has been.
balderdash|1 year ago
Workaccount2|1 year ago
The most valuable thing to lenders is someone who can 100% be counted on to always pay, even if things outside their control turn against them. People chronically fail to understand this, and end up putting themselves in financially precarious situations i.e. paycheck-to-paycheck living.
nullc|1 year ago
The credit score is essentially price discrimination predicated on customers not being able to find and follow instructions. It also happens to give poor scores to people who are credit risks, but the difference between a meh score and a high one is mostly your ability to munchkin a bit.
[Edit: just checked, mine is 808.]
bluedays|1 year ago
Harmohit|1 year ago
It will also offer the lay person insights into how the credit rating is exactly determined. They can know what is causing their rating to be less than desired and take appropriate action, instead of watching a random youtube video titled "5 ways to quickly improve your credit score".
akira2501|1 year ago
Presumably the reason they have a lower score than desired is because they already failed to do this in one form or another.
> "5 ways to quickly improve your credit score".
Have no inquiries. Have no forced account closures or writeoffs. Have as much total open credit as you can without triggering the first two. Have at least one secured or unsecured installment loan open and then paid off every 5 years. Always pay your bills on time.
It's not quick, I suppose, but the recipe is already pretty well known.
alistairSH|1 year ago
For example, I know my score swings by +/-30 points/month. I'm fairly confident that is due to the balance on my CCs varying when the score is calculated (there is nothing else about my financial situation changing - same house for a decade, same car loan for 5 years, no new credit lines/loans, etc). But, I pay the cards off every month, and the score always rebounds.
astura|1 year ago
https://www.myfico.com/credit-education/whats-in-your-credit...