The Federal statute known as the Equal Credit Opportunity Act, or “ECOA,”
is the law that forbids discrimination on the basis of race, color,
religion, national origin, sex, marital status, age or acceptance of
public assistance. It applies to all aspects of public life in America,
including lending. If you look the next time you visit a bank branch or
credit union, you’ll see signs summarizing your rights under the ECOA.
while protections from discrimination are the most commonly known
provisions of the ECOA, few people realize that the Act also addresses
credit scores. The ECOA does not endorse or require the use of credit
scores by lenders, or any other party. But, it does define what is a
“credit score” and sets the standards that scoring systems must meet in
order to be considered empirically derived, which is important because it allows for a larger breadth of information to be considered.
credit score, according to the ECOA, is a system that evaluates
creditworthiness mechanically based on attributes associated with an
applicant. In order for a credit scoring system to be considered
empirically derived, it must be constructed using accepted statistical
methodologies, and it must also be revalidated periodically to maintain
its predictive abilities. What all of this means in English is the
scoring model must be built using scientific methods and it must
In the world of credit scoring models, to “work” means a model must properly rank order
the consumers it evaluates. Rank ordering is the formal term for
assigning higher scores to people who are good credit risks (i.e., those
who are most likely to repay their debts on time) and lower scores to
people who are poorer credit risks. Credit scoring models which base
their calculations on credit-file data maintained by the three major
credit reporting companies (CRCs)—Equifax, Experian and TransUnion—have
been recognized as empirically derived for more than 25 years. Continual
validation by model developers has proven how effective these CRC-based
scores are at rank ordering, which is why they have become so ingrained
in lenders’ automated underwriting and risk assessment processes.
CRC-based scoring models have also been recognized as fair and impartial
Why does this matter to the average consumer—even
one who is not subject to the other protections of the ECOA? It means
that whenever a lender uses a CRC-based credit scoring model to make a
decision about your credit application, it is using a tool that is
unbiased and is not based on flawed assumptions.
especially comforting considering the amount of media coverage that is
focusing on the potential use of social media activity to measure credit
risk. The legitimacy of such data under ECOA is far from established
and as a result, there is little chance that social media data will be
used to influence your credit score anytime soon.
matters because CRC-based credit scores continue to be the most commonly
used of all scoring tools, and there’s nothing to suggest their use
will diminish in the future. The ECOA requirement that credit scoring
models be continually revalidated means that lenders must test them and
prove that they continue to work.
VantageScore Solutions is unique in the credit scoring industry because we publish the results of our annual model validation on our website, for all to see. The most recent validation report is available here.