FICO is expected to roll out an additional type of score, the UltraFICO, in the first half of 2019. To learn what this means for borrowers and the credit unions that serve them, we sat down with Yvonne Stepflug, CO-OP’s Vice President of Credit Products.
What is the purpose behind the UltraFICO score?
The new calculation is designed to give creditors a better sense of how consumers manage their cash by looking at their behavior relative to checking, savings and money market accounts. This intention is to provide greater access to credit for more of the underserved and “credit invisible” segments in the U.S.
What is the expected impact?
There is a lot of hype around the new scores. One national newspaper, for instance, called the development of this alternative score “among the biggest shifts for credit reporting.” However, the average consumer’s UltraFICO score is not likely to be all that much different than their traditional FICO score, which will remain in existence.
Consumers with scores below 700 are predicted to see a 20-point increase in their UltraFICO as compared to their traditional FICO. Twenty points can have an impact on lending options and pricing for some borrowers, but is not a significant change in a credit score. Consumers will be able to elect which score – UltraFICO or traditional FICO – creditors use to make decisions.
How will consumers communicate their choice of score to lenders?
FICO has not yet announced these details. It is possible new borrowers will make their elections during the credit application process. Members with existing loans may be asked to opt-in to a creditor’s use of UltraFICO to make decisions on things like line increases, rate changes or account closure. We’re keeping a close eye on announcements from FICO and will be providing our credit union clients with updates – and guidance – as they are communicated to CO-OP.
Is the addition of UltraFICO a good thing for credit unions?
As with most changes, there are pros and cons. The most meaningful upside is that credit unions may be able to provide credit to more members, further advancing the credit union mission. Aside from making it easier to help more people build credit and improve their overall financial health, credit unions may also benefit from the attraction of new segments of the community to membership, and also to stimulate overall membership growth and retention.
Downsides may include the risk of lending to non-traditional borrowers; investment in updating policies and procedures; integration of risk monitoring tools; management of larger volumes/velocity of data; and addressing a greater number of borrower inquiries.
Will this enable credit unions to extend credit to more people?
That depends on a credit union’s underwriting standards and overall lending philosophy. One thing to keep in mind is that 20 points, while meaningful, is not a dramatic boost in a credit score. So, a decision made based on a traditional FICO score may not change by considering the UltraFICO.
One thing UltraFICO does afford loan officers, loan committee members and other decision makers is a more qualitative approach to making affirmative decisions on borrowers that may not qualify using traditional standards or following mainstream models. Credit unions have always operated this way – making decisions based on the whole member, not the member’s score. However, the UltraFICO will give decision makers a more robust set of quantitative data to analyze as they consider exceptions.
Will UltraFICO open credit unions up to greater risk?
There is an element of risk with any extension of credit. Credit unions will have to manage loans made with UltraFICO the same as loans made with traditional FICO. Balancing risk with reward will continue to be a challenge as long as credit unions make loans.
How will this change the way credit unions report to FICO?
FICO has not yet announced the details around the operational components of reporting. However, we can probably assume credit unions will have to recode their file feeds to FICO either through their loan origination software or their core processing solution.
A more substantial challenge may be investigating a greater number of borrower claims of inaccurate UltraFICO histories. Whereas today these claims are confined to credit accounts (e.g., auto, home, credit cards), they will become a part of deposit account management in 2019.
Is there concern around the amount of personal data FICO is collecting?
Media have reported consumer and expert concern. The UltraFICO scores will force more financial and personal data through the data streams connecting financial institutions and FICO systems. Consumers are paying more attention to the security of their personal information, and this may impact the way credit unions talk to members about their policies, procedures and security practices within lending and data.
What, if any, steps can credit union take now to prepare for UltraFICO?
Now is a good time to begin socializing your credit union’s plans for a future with UltraFICO. Start to talk about it with your board, loan committee and lending team members. You may even choose to talk with members about it. News media are reporting on it, so they may have questions about how this impacts their existing loan products. Let them know you are having internal discussions and keeping a close eye on FICO’s announcements as they roll out.
Will credit unions need to make changes to lending policies and procedures?
Yes. Consumers will be able to direct credit unions to use UltraFICO beginning this year. Therefore, credit unions will need to address it in their policies and procedures.
How is UltraFICO expected to impact existing credit accounts?
This is an opportunity CO-OP is especially excited about. As our SmartGrowth portfolio analytics team builds and deploys predictive models to inform credit line, pricing and other portfolio optimization strategies, we’ll be monitoring the potential of incorporating UltraFICO scores as rules and regulations around the new calculation are announced.
Learn more about CO-OP’s full suite of Credit Solutions, designed to offer the competitive, benefit-rich credit products members expect while driving increased usage and profitability through advanced analytics.