Banks, Lenders Moving Away from FICO for Loan Determinations

Large banks and lenders are moving away from using FICO credit scores for consumer credit decisions like auto loans and mortgages. FICO has provided scores for nearly 200 million U.S. consumers, but regulators are concerned that it leaves too many consumers out because of thin or nonexistent borrowing histories.

“FICO scores are good, but they’re not perfect,” stated Roger Hochschild, chief executive of Discover Financial Services, according to the Wall Street Journal. Hochschild also revealed that Discover is using FICO scores less when evaluating existing customers.

FICO scores range from 300 to 850, and are calculated using data in consumers’ credit reports like payment history, spending limits, and credit applications. Borrowers often check their FICO scores before applying for credit, but large banks are increasingly approving applicants with lower scores. Still, FICO sold more than 10 billion scores in the last year, and that figure has remained steady over the past few years.

Along with Discover, JPMorgan Chase & Co. and Bank of American Corp. are not using FICO as frequently for underwriting decisions. Capital One Financial Corp. and Synchrony Financial rarely use its scores for consumer-lending decisions. Many lenders now review new data to refine their proprietary scores to better predict which consumers will repay and which will not.

Lenders increasingly relied less on FICO scores during the COVID-19 pandemic because the scores do not reflect deferment and forbearance programs. According to bank credit executives, their own internal data is more reliable because it takes into account information from credit reports, deposit balances, and overdrafts, as well as their own lending relationships with customers.

Additionally, the Office of the Comptroller of the Currency (OCC) recently enlisted banks and fintech firms to find new ways to underwrite loans with the Roundtable for Economic Access and Change, educating lenders about the pitfalls of using traditional credit scores.

“There are many other sources of data that can indicate a person’s creditworthiness that weren’t available before,” said Will Graylin, a Synchrony board member.