The FICO Resilence Index
FICO launches consumer resilience score By Jennifer Kang 29 Jun 2020 FICO on Monday released a new scoring tool to help lenders gauge the resilience of consumers in an economic downturn, though sources say it could take up to six months from the end of government support programs before the data can be usable as current data is obscured by a range of debt forbearance policies. FICO's Resilience Index is an analytics tool that aims to distinguish among consumers that are more likely to weather a downturn by reviewing factors like debt payment history, experience with credit, debt consolidation and active account openings, Sally Taylor, vice president of FICO Scores, told GlobalCapital. For example, borrowers with more experience managing different loans are more "resilient” than those without. On the other hand, aggressive borrowers who have more active accounts than others are less resilient to stress. In an upcycle, all of these borrowers may end up getting the same credit score because they appear the same, something FICO is seeking to clarify with the latest release. “FICO has created a score to institutionalize something that we in the lending area have understood for a long time, which is that when the economic environment is in good shape, people who are more marginal, risky borrowers perform much better than they would in a downturn,” said industry veteran Kevin Moss, former chief risk officer at SoFi and executive vice president and Wells Fargo. The new index works in tandem with the FICO score and will be offered to all lenders for free. The program had been in the works for years and was meant to launch earlier in 2020, but FICO decided to hold off so the industry could focus on the developing pandemic situation, said a company spokesperson. The interest towards the index so far has been “across the board,” said Dave Shellenberger, vice president of FICO scores and predictive analytics, but secondary market mortgage lenders and auto lenders were “most intrigued.” “I think part of the reason there is we’ve shown that it is possible lenders can increase exposure and continue to make loans safely without taking on extraordinary risk to keep the credit flowing,” Shellenberger said. The uptake for the Resilience Index will likely be higher than FICO’s usual score updates because the product is an add on rather than a replacement, Taylor said. A replacement may require several years because it requires heavy lifting for lenders to evaluate the new score, adjust it and implement it. Some lenders decide to skip updates entirely because the older version works well for them. However, sources say lenders should continue to collect consumer data and track the index for at least six months after deferral programs go away to understand how it works because current credit bureau data is skewed. Since various government and private lender forbearance schemes kicked in during the early days of the pandemic, many consumers have taken payment breaks on at least some of their debt. According to the Mortgage Bankers Association, forbearance stands at 8.55% as of June 7, with around 4.3 million homeowners in forbearance.
In credit cards, the number of prime credit card accounts in “financial hardship” increased to 3,540 per 100,000 cards in April from just eight accounts out of 100,000, based on data from TransUnion. “Financial hardship” status means the borrower has asked for some sort of deferral.
While lenders may assume many of these consumers will recover, the real number of consumers ultimately unable to repay is still hidden.
“These are uncertain times. Right now, I would not recommend putting this into your process until you really understand how it is working,” said Moss. “There’s no reason why a lender shouldn’t get [the index], but you would need at least six months to understand how and where you should use the index."
Along with FICO, other data analytics companies like Experian and Equifax are coming up with new tracking indices that make use of alternative data, a “smart move” to make in a time like this, a market participant said.