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Lenders Should Assess Credit Score Alternatives to Enter New Markets
By James Comtois
The credit scoring market is established in terms of product acceptance, loan processing efficiency and decisioning speed. However, lenders are requiring better stratification of consumer credit risk than current scoring provides, according to a new report released by research and consulting firm TowerGroup. More nuanced credit stratification is of particular concern as financial institutions struggle with climbing defaults and losses in the subprime market.
In its report, entitled "What's the Score? New Risks, Credit Scores and Revenue Opportunities in U.S. Consumer Credit Markets," TowerGroup contends that lenders need to evaluate new, improved and custom credit scores to enter new market segments, update underwriting and pricing policies and refine credit risk evaluation to adapt to market conditions. Additionally, vendors of loan origination and servicing products should analyze the impact of changing credit reporting and scoring systems on their systems, processes and lender customers.
Credit scores are crucial input for opening loan accounts and analyzing loan portfolio credit in lending for mortgage and home equity purposes. Now lenders need to ask when a superior credit risk prediction justifies the costs of converting to a new credit score, which is an issue largely overlooked from the perspective of scoring vendors was the intense competition for credit score revenues in the consumer-direct customer segment.
Another question for lenders is whether the different credit score ranges, score methodologies and data sources make VantageScore better than the Classic FICO score from Fair Isaac Corporation. However, the report asserts that although VantageScore will have moderate success in the consumer-direct and credit card lending market segments, it will have difficulty among mortgage and home equity lenders.
In March 2006, Equifax, Experian and TransUnion introduced the jointly developed VantageScore, a new consumer credit score for lenders and consumers. According to TowerGroup, as of February 2007, although numerous lenders were testing VantageScore, few lenders were using VantageScore to prescreen consumers or to underwrite loans. Consumers are purchasing the credit score through the Internet channel.
In TowerGroup's estimation, the consumer-direct customer segment for credit reporting and scoring products will grow 39% to 2010 from 2001 and is currently a larger growth market than the lender market.
Additionally, to engage in new markets, lenders should analyze the ROI of a new scoring system and include the value of new loans originated to new customer segments, better capabilities for risk prediction and improved loan pricing.
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