Credit reporting agencies use a formula for reporting  credit called "credit scoring" Law Offices of Fred M. Duman & Associates 2807 Castro Valley Boulevard     Castro Valley, California 94546 Tel: (510) 537-3388 Fax: (510) 889-1114

Dear Mr. Duman:

I filled out two pre-approval applications for loans.  A few months after doing so, I received numerous savings and loan junk mail offers.  I was concerned, so I asked TRW, now Esperian, for a current credit report.  I received this report, and it showed 21 hits (inquiries).

My credit history is clean.  My sister and I own two homes together, but I am attempting to purchase a home as a single female without a co-borrower.  However, two loan companies have denied me credit, even though I have $30,000.00 in savings.

Please explain what is going on.

S. J., Oakland

Your question is one of significant interest to our readers.  It concerns the practice of “credit scoring.”  To answer your question, I have requested a response from S. Guy Puccio, of Sacramento, California, a well known lobbyist, expert and educator in matters involving real estate financing and transactions.

Puccio states:

“Credit scoring is a recent phenomenon arising out of the need and the demand of lenders and borrowers to quickly and uniformly measure the capacity and the desire of the borrower to repay  the loan requested.  Automated underwriting, where credit is granted almost as soon as the application is received, has required the adoption of some form of instant credit analysis.  The evolution of the computer has been followed by major changes in the mortgage lending and brokerage industries.  Among these changes is the use of “credit scores”, which are mathematical representations of the borrower’s credit file.

“While credit scores have been around for some time, it is only recently that their use has played a significant role in mortgage lending.  Information, which forms the basis of credit reports is typically obtained on borrowers from one or more of three repositories.   While numerous credit reporting agencies exist, these agencies are merely bureaus, which obtain their information from one of three repositories, which are known as TRW (recently renamed Esperian), Trans-Union and Equifax.

 “Credit scoring is a mathematical process to measure the risk to the creditor, when contemplating the extension of credit to the borrower.  Each item reported has a number, representing the creditor’s potential risk factor.

“Each repository has its own name for the credit scores it uses.  Equifax calls its score card a “BEACON”, and Trans-Union calls it an “EMPIRICA” score.  The name for the one used by TRW has become almost an industry standard, and it is known as the “FICO” score.

“FICO is an acronym for Fair, Isaac and Co., headquartered in San Rafael, California.  Even though it would appear that each repository would have their own individual methods of developing the credit score they promulgate, the EMPIRICA, BEACON, and FICO scores are all derived from the same or similar statistical models, and Fair, Isaac and Co. is the primary source for them all.  Unfortunately, lenders typically will not reveal to mortgage brokers or borrowers the individual FICO score assigned.

“The number of inquiries that the borrower has authorized may negatively affect the credit score, resulting in a less favorable loan product being offered by the lender with whom a loan application has been filed.  For example, a consumer shopping for an automobile or for a real estate loan, may provide the dealer, the real estate broker, the mortgage broker, or lender with their Social Security Number, and implicit or express authority to proceed with obtaining a credit report.  Each such inquiry, even if the consumer does not accept any extension of credit, may result in a diminution of the ultimate credit score.

 In addition, the percentage usage of credit lines available from credit card issuers, without regard to the individual’s income, and therefore capacity, to pay the debt service on the credit use, may lower the credit score.  For example, a borrower who frequently spends up to 75% or 80% of their available credit on their credit card and pays that amount off monthly, may have a lower score than a borrower who only uses 20 to 30% regularly of the credit on their credit card, even though the first borrower has substantially more income.

“Another illustration of difficulties with the credit scoring systems, now employed, is the fact that the nature and quality of the lender with whom the consumer has done business in the past may lower the credit score, regardless of the consumer borrower’s performance in connection with the extension of credit.  That is to say, the borrower may have performed entirely as agreed, but when the lender is not considered to be a first line source of credit,  the result may be that the credit score may be reduced.

“Lenders and government agencies and enterprises insist that the method of developing credit scores is a trade secret.  Therefore, open discussion of some of the issues presented by credit scoring, as described in this column, have not been adequately pursued by lenders, brokers, or borrowers.

“It would appear that the borrower’s right to full disclosure about credit scores, how they are mathematically achieved, and the impact of credit scoring upon the borrower’s ability to qualify and receive the best available loan product has been temporarily sublimated to the demands of electronic loan processing.”

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09/18/9