Go ahead, shoot the messenger

Techdirt: Tighter Lending Standards Make Credit-Piggybacking Services More Popular

This issue — whereby a person can “piggyback” on another’s credit report and gain benefit from it — is just one that’s fueling financial institutions’ unhappiness with FICO scores, and the company behind the system, Fair Isaac, says it’s making changes to eliminate the positive influence of piggybacking.

Well, not exactly shoot the messenger, but I couldn’t think of a more accurate yet still catchy title.  What’s going on here is that people are using what amounts to a loophole in your FICO score that makes it beneficial to “rent” your good credit to some schmuck, allowing the schmuck to get a loan.

The proper response here, which is what Fair Isaac is doing, is to fix the FICO so that this doesn’t give the score lender a bump.  It will all but eliminate the market for this stuff because no one will want to do it anymore.

The improper response is what the lenders will probably do instead, which is to move away from the industry standard and make up their own numbers.

I did financial analysis at a very large company in the mortgage field for about a year just out of college, and one of the things I learned is that a FICO score is a remarkably good predictor of loan performance.  The company I worked for employed some very smart economists to try and come up with a better method (Or at least an in-house method so they could stop paying for FICO scores), and I don’t think they ever really improved on FICO.

And lately, lenders have shown that they really aren’t very good at predicting loan performance (See:  subprime mortgage market implosion).  So getting away from a score that may need a little tweaking, but has been really good for a long time, seems a little silly.

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