ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Sunday, February 25, 1996 TAG: 9602270015
SECTION: BUSINESS PAGE: G-1 EDITION: METRO
COLUMN: Banking
SOURCE: MAG POFF
People who resent being reduced to numbers are bound to feel even more like a cipher with the spread of credit scoring among banks and other lenders.
If you have a bank credit card in your wallet, you almost surely have been through the process - even if you didn't know about it. A lot of banks also use the system for approving or rejecting applications for consumer installment credit.
But now the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) have said they will demand credit scoring on the loans they buy on the secondary market and resell to investors.
Because banks want to sell their mortgages to raise cash, they will be forced to go along with the requirements of these agencies.
The system was bound to spread, however.
The theory behind the push to credit scoring is that it eliminates all subjective criteria - such as race, gender and national origin - from credit applications. It insulates the process of awarding credit from even subconscious prejudice. People seeking credit become merely the numerical embodiment of their credit histories.
Still, some critics have objected to the system on the ground that the system discriminates against minorities who may have poorer credit histories because they are financially disadvantaged.
The public reputation of statistical credit scoring also suffered adverse publicity several weeks ago when the Bank of New York rejected a credit card application from Lawrence B. Lindsey, a governor of the Federal Reserve Board. Lindsey was denied a Toys R Us credit card simply because he had too many inquiries about his credit record.
In the case of the Bank of New York, which would be the laughing stock of the industry if banks thought the situation was amusing, no human being ever even looked at the application from Lindsey. The computer turned him down on its own and even generated the rejection letter.
The way the system is supposed to work is by assigning numbers to our credit history, which is collected from credit reporting agencies.
Questions asked in the process are how much has this person borrowed? How has he paid back the money? How often is the person past due in her payments? Has there ever been a legal action against the applicant to collect overdue accounts?
The list goes on - even to noting if there's a high number of inquiries about the credit history, as in Lindsey's case. That could be a signal that a person is suddenly taking on too much debt. On the other hand, it could be something as innocuous as the person comparison shopping for an auto loan or home refinancing.
Most of the banks use software made by Fair, Isaac & Co. of San Rafael, Calif.
Under this system, numbers are assigned for each aspect of the person's credit history.
Scores of 780 or higher are supposed to produce premium-quality loans and mortgages for the lender.
Defaults are supposed to be heavily concentrated in loans that score below 620. Banks and mortgage companies want few of those applicants.
Many - but not all - area bankers defend the scoring system.
Jim Allen, senior vice president for risk management and consumer credit policy at NationsBank, said the bank employs credit scoring for virtually all consumer products and for most mortgages originating through bank branches. The company's home loan subsidiary, Nationsbanc Mortgage, will start using the system later this year.
NationsBank has used credit scoring in some form since 1983. "It's pretty much a part of the fabric of the company," Allen said.
To Allen, the Lindsey incident proves that credit scoring works. Lindsey had a lot of inquiries in a short time and had suddenly started to revolve credit, suggesting a person getting into credit trouble.
Credit scoring, Allen said, is "blind as to who the person is," concentrating only on the person's risk profile. Lindsey, he said, was "rated like any other applicant."
Allen said the Fair, Isaac software considers 120 to 125 variables in a person's credit history, most of them from credit reports rather than from the application.
The system, Allen said, is consistent, objective and quick. The computer, he added, comes without the "judgmental baggage" of a loan officer.
Even so, he said, a loan officer reviews all applications before one is rejected
Credit scoring for mortgages will go into effect Friday at First Union Corp., according to spokesman David Scanzoni. It's been used for credit card applications for years.
The "key point," Scanzoni said, is that it will be "only a supplemental tool, not the determining instrument." A human being will review all applications that the computer rejects. The bank's goal, he said, is to make as many good loans as possible to credit-worthy individuals.
Even so, Scanzoni said, the computer is "attractive because it's blind to anything except the manner in which credit has been used in the past." It doesn't see gender, race or ethnicity.
John McMurray, executive vice president of Crestar Mortgage Co., said the system is used now only for mortgages sold to Freddie Mac. Credit scoring is coming more slowly to mortgages than it did to credit card and other bank lending businesses, he said.
About half of the applications for mortgages are approved by the computer very quickly, McMurray said. Applications that are rejected and questioned are referred to human underwriters who have more time to concentrate on them.
Rob Moreno, a spokesman for Signet Bank, said credit scoring is employed for credit cards and the bank is moving toward implementing the system for mortgages.
Computer analysis, he said, is just an adjunct to the credit process because an employee looks at all rejected applications. "At times you want to be a little subjective and look at people in their own circumstances," Moreno said.
"We don't use it," said Guy W. Byrd Jr., president of Valley Bank of Roanoke. Credit scoring is not required, he said, and "we choose not to use it."
One of the hallmarks of Valley Bank is its decision to retain the mortgages it makes instead of selling them on the secondary market, Byrd said. That means credit scoring will not be imposed on the bank by national investors.
Even applications for credit cards and car loans are processed by hand, he said.
"People are as well informed as some machine," Byrd said, and better able to take into account the intangibles on a credit application. "Customers get at least as good, if not better, service."
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