SIFMA Chief Operating Officer, Joe Seidel, recently sat down with Jim Wehmann, Executive Vice President, Scores, FICO, for a one-on-one conversation on policy impacts and the role of credit scores in the secondary market. This is an excerpt from their conversation, one in a series of Executive Viewpoints at SIFMA’s 2021 Annual Meeting.

About Executive Viewpoints

Filmed for SIFMA’s 2021 Annual Meeting, Executive Viewpoints is a series of insightful conversations about trends and innovations shaping the future of our capital markets. The capital markets are in the midst of major transformation, arguably one of their most fundamental shifts yet. In this special series, SIFMA president and CEO Kenneth E. Bentsen, Jr. and chief operating officer Joseph Seidel interview a cross-section of experts to understand just some of the dynamics at play in the market’s next evolution.

To view more from the 2021 SIFMA Annual Meeting, please visit www.sifma.org/annual.

A Conversation with Jim Wehmann

Joe Seidel: In September, the Mercator Advisory Group released some research findings that the FICO score is holding strong as the predominant risk metric across the major asset-backed securities classes. What do you think contributes to that success?

Jim Wehmann: It comes down to a word: “trust.” We take the trust and the reliability of the score very seriously. We’ve been around for 30 years. We’ve proven ourselves through the economic cycles. We really need to take that as one of our highest priorities as we redevelop the score, and that’s the reliability and the trust that not only lenders but other stakeholders, like investors, put in the score. Can they trust that it means what it has always meant in the past and what it should stand for in the future?

There’s pressure on FICO from time to time to reduce our standards—minimum-scoring criteria—and we’ve resisted that. We could, frankly, make more money scoring more people.

We believe that those scores are less reliable and would, in certain cases, where somebody’s very first thing that they get from a credit perspective in their credit life is a charge-off, maybe from a telco or a utility. That gets reported to credit bureaus, and there’s no positive data that comes into that. We don’t think it’s really fair to score those, and so we don’t.

We really want to do the right thing, and trust that investors from here and around the world place in the FICO score is really paramount.

Joe Seidel: You all have really been the gold standard over the years, haven’t you?

Jim Wehmann: We continue to redevelop the score and make it better. We’ve released more recently a FICO Score 10, which is the successor score to that original FICO score. It’s backwards-compatible. It’s the same score range and the same odds-to-score relationship.

Those are the kinds of things that people can count on to trust as we move from one version to another. You get different versions of the FICO score depending on the lender who is using those scores and then sharing those scores with investors in various asset classes. We have been the industry standard and the benchmark for decades now.

Joe Seidel: Given the events of the pandemic, has that changed your approach at all to the FICO score? Does it change how investors should view it?

Jim Wehmann: Obviously, it’s unprecedented times with the pandemic. Policymakers and I would say lenders, did a great thing [by] people who were impacted by the pandemic and economically, through no fault of their own, through the CARES Act.

The forbearance of lenders to not report the delinquencies during that period . . . the data . . . those accounts were then frozen. If they had delinquency going into the pandemic, that delinquency remained. If they were current but got a forbearance, then their accounts or their files stayed in those states.

During the pandemic delinquencies and charge-offs have been great, and consumers have actually increased their savings rates and paid down debt. That’s really been a positive outcome for the support that government has provided to consumers as well as lenders. So we should applaud that.

Now, as people are coming out of the forbearance and accommodations, we’ll watch to see what happens to those accounts. That’s really been happening for a while and will continue to happen for some time.

During this time, the FICO score has continued to increase. The average FICO scores of the U.S. population just continue to go up. That represents the results of consumers and government support and lenders themselves helping consumers through this period.

Joe Seidel: In light of Covid, some in Congress now are calling for credit suppression—withholding information from credit bureaus—which would make your job and the credit community’s job much harder. What impact do you think that these credit-suppression efforts would have on the reliability of a FICO score?

Jim Wehmann:  It’s something that comes up from time to time, and we certainly leave it to policymakers and others to make the right judgments about what’s appropriate to be included in data that then flows in to calculate credit scores and a FICO score.

We certainly have our view, and the score is only as good as the data that goes into it. And so we understand the impulse. The impulse during this period is that people shouldn’t be impacted if something happened to them that caused them to have financial distress through no fault of their own.

We think maybe the best approach is to find other data that can help paint a broader and better and more full picture of the financial health of consumers. So rather than taking things away, in general, we’d really like to see more of an effort.

We’ve got our own efforts that we can talk about that really look to other data that can help, again, kind of fill out the picture of consumers where there may be an episodic thing that is really very temporary, that will be overcome shortly, that may override that negative data that ends up in the credit file through, again, other data that can help us paint that fuller picture.

Joe Seidel: Those are fascinating modeling questions. You all have always been thought leaders. What are your priorities right now on the regulatory front relating to credit scores and underwriting?

Jim Wehmann: We are actively involved in and continue to kind of stay close to the perspectives and opinions of regulators. Our clients, the lenders, are very concerned and thoughtful about this. We need to be, as well. We attempt to create scores that are bought by tens of thousands of lenders and so we need to be thoughtful about how it’s viewed by lenders who are concerned about regulatory issues and regulators themselves.

One thing that has been active for some time is the FHFA and Fannie Mae and Freddie Mac’s work in the mortgage space. A law was passed and a rule was written to ask them to evaluate scores and to update from what we call the “classic score” that was implemented many years ago.

We’ve been participating in that process following the law. There are periods where we’ve applied for our scores to be evaluated, and we went through that process. And that process continues to play itself out. We expect sometime next year for that process to resolve, to come to completion and there to be an announcement about how that’s going. We continue to support that. The competition between the submissions of vendors that are applying for that is good, and we applaud that. We hope the best score wins.

Joe Seidel: How are you innovating with the FICO score? What changes do you see coming in the future that you’re thinking about experimenting with?

Jim Wehmann: We recently announced our latest score suite, which is FICO Score 10. We also built a sister score to that, which is FICO Score 10T, built on the same timeline.

We just recently introduced those scores, and that’s good because they’re more predictive than prior scores. More prediction means more people will qualify at certain cutoff rates, and that’s a good thing. FICO 10T, it’s built on what we call “trended data” that the credit bureaus have more recently included in their credit files, and we built the score based on that. Again, that’s that additional data that we talked about that can help improve the prediction and accuracy of the score.

Beyond that, we always, from the very beginning, included telco and utility trade lines in the FICO scores. Many people don’t quite understand that, but the scores that the GSEs are using and the scores [across] the lending ecosystem are using, those FICO scores, include telco and utility as trade lines. We’ll consider those.

In FICO Score 9 and 10, we included rental data in the score as a tradeline, as well. The fact of the matter is not much in the way of telco and utility is reported into the three national credit bureaus. Much of that is housed in a database outside of that’s managed by Equifax.

There are over 200 million consumers who have cell phone payments being made and a small amount of utility payments or cable bills being paid, and we built a score called “FICO Score XD” based on that data.

Trying to find extra data and additional data to help paint a fuller picture of the credit-risk profile is a mission that we’ve been on. We can score 11 million people who have no credit-bureau file at all, have never had any student loan or credit card or anything that generated a file at the three credit bureaus. That’s a great way for people to get access to credit for the very first time: through FICO Score XD.

We also created something called the “UltraFICO Score,” and this is built on data in checking accounts and savings accounts, and money-market accounts. That too is built on data that’s not in the traditional credit-bureau files and can help improve scores, especially for people starting out, who have what we call “thin files” or not much data. That extra data can help give a more, again, fuller picture sooner for people who are just starting out on their credit journey.

We created something called the “FICO Resilience Index.” This was interesting. It was built on data that we got from the last financial crisis in 2009 and ’10. What that data allowed us to do was build a score that could predict, of the 680s or of the 700 FICO scores, which ones were going to struggle most in a downturn under financial stress. We were successful in doing that.

We had this thing called the “FICO Resilience Index.” It actually predicts people who were most likely to get accommodation, say, in a small group of homogenous FICO score ranges. Of the 680s, the FICO Resilience Index could predict who, among those, were most likely to ask for and get an accommodation.

It’s now been validated in an out-of-time sample. We had the Great Recession, and now we’ve had the Covid impact. And the FICO Resilience Index is really—it’s a great score that complements and does something very different than the FICO score.

With the FICO score, you get that stack rank of risk from highest to lowest, and that curve then shifts up and down. With the FICO Resilience Index, you can predict across the FICO score range who, in a downturn, is going to have an impact relative to others in their FICO score range. That’s another great innovation that FICO has been working on.

Joe Seidel: You can certainly see how you guys stay the gold standard in terms of continually thinking and revising and revisiting and looking for new data sets and new methodologies.

Watch the Full Conversation

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Jim Wehmann is Executive Vice President of Scores of FICO. Prior to working at FICO, Jim was senior vice president, global marketing at Digital River, a leading provider of cloud commerce solutions.

 

 

Joseph Seidel is Chief Operating Officer of SIFMA. He manages the day-to-day operations of the Association, including core legal, regulatory, business practices, public policy and communications activities.