10 years, 10 milestones
There have been many crucial and decisive moments for VantageScore Solutions, LLC in in the ten years since the launch of the company, but the following stand out as truly significant events that made the company what it is today and that will help set the tone for additional progress in the years ahead.
VantageScore 1.0 launch
March 2006: VantageScore Solutions was born with the launch of the original VantageScore credit scoring model. Jointly developed by a team of data scientists from the three national credit reporting companies (CRCs)—Equifax, Experian and TransUnion—it was the first true tri-bureau credit scoring model: That is, it was a single piece of software capable of operating identically on data from all three CRCs. (This breakthrough, which contrasts with other models’ use of custom programmed models designed for each CRC, has remained in subsequent versions of the VantageScore model.) The model, now known as VantageScore 1.0, was designed from scratch to provide superior accuracy in predicting payment defaults; to achieve greater score consistency across the three CRCs; and to be consumer-friendly, with an easy-to-understand scale range of 501-990, in which scores in different bands corresponded to letter “grades” familiar to schoolchildren everywhere: Scores from 900-990 were considered “excellent,” and assigned “A” grades; those ranging from 800-899 are “good,” and assigned “B” grades, and so on.
This VantageScore credit scoring model was the first generic credit scoring model designed to give consumers the benefit of on-time rental- and utility-payment information present in their credit files—a trait retained by all subsequent VantageScore models, and eventually emulated by our competitors as well.
From our earliest days, VantageScore Solutions has applied for and obtained U.S. patents related to the unique analytical methods used in our models. The company has been awarded seven patents to date. The first, in 2010, concerns “characteristic leveling,” a technique for ensuring that when the same credit data is available from multiple sources, e.g., two or more credit reporting agencies, it is interpreted in the same manner. Additional patents have covered refinements and other techniques for advancing a tri-bureau model (i.e., a single piece of software that operates identically on data from all three CRCs); maintaining score consistency across multiple CRCs; and efficient segmentation of consumer populations—defining a set of sub-populations that, when modeled individually and then combined, rank consumers in order according to default risk more effectively than a single model applied to the overall population.
VantageScore 2.0 debuts
In October 2010, VantageScore introduced version 2.0 of its credit scoring model, largely in response to the upheaval of the Recession that followed the 2008 collapse of the U.S. housing market. The Recession brought significant changes in consumer behavior with respect to credit usage and payments, which affected the predictive strength of scoring models based on pre-Recession consumer data. The VantageScore 2.0 model retained the robust architecture of the VantageScore 1.0 model, including its leveled-characteristic design and segmentation structure, but derived significant performance improvements through enhancement of the underlying consumer behavior data used to configure its algorithm. The dataset was designed to reflect consumer behaviors from multiple outcome periods over an extended timeframe, 2006 to 2009, in order to capture both non-Recession and Recession-period behaviors. Additionally, 45 million credit files were used to create the dataset—15 million from each CRC. This broad and deep dataset provides an expansive sample of diverse consumer behaviors.
Legal wrangling ends
Early in our first year of existence, VantageScore was plunged into a legal battle that sought to put us out of business, even as we scrambled to establish a competitive foothold. FICO, then (as today) the industry’s largest player, brought suit in federal court alleging trademark infringement, anti-competitive behavior, false advertising, and unreasonable and illegal restraint of trade. Following a succession of decisions in our favor, the matter was at last put to rest in August 2011, when the U.S. Court of Appeals for the Eighth Circuit affirmed the prior rulings (including a jury verdict in our favor).
Partnership with Consumer Federation of America
A founding principle of VantageScore Solutions is greater transparency and education in the credit scoring process. This is evident in the annual publication of our model-validation results, and also in our strong commitment to consumer education about credit scores, the behaviors that influence them, and steps that can be taken to improve them. Those consumer-education efforts took a huge step forward in 2011, when VantageScore established a partnership with the Consumer Federation of America (CFA), a nonprofit association of nearly 300 consumer groups founded in 1968 to advance the consumer interest through research, advocacy, and education.
The CFA-VantageScore partnership gave rise to an annual consumer survey of U.S. consumers to gauge awareness regarding credit score-related issues, and CreditScoreQuiz.org, an educational website consumers can use to test their understanding of credit scoring and related issues. VantageScore and CFA relaunched the Quiz website in June 2015 to provide a streamlined user experience, and since then, more than 12,000 visitors have taken the quiz. The sixth annual Credit Knowledge Survey is scheduled to take place later this spring.
FDIC adopts PD-based risk assessment
In 2012, the Federal Deposit Insurance Corporation revised its rules for assessing default risk on loans issued by banks with deposits in excess of $10 billion. Instead of evaluating loans on a particular credit score, the revision calls for examining the underlying probability of default (PD) associated with those loans at the time of origination. This change enables FDIC-insured large banks to use any valid credit scoring model they choose, as long as they align the model with PD values.
In April 2013, to coincide with the effective date of the new rules, VantageScore Solutions issued a white paper, New Definition of Higher-Risk Consumer Loans and Securities… formerly known as Subprime: FDIC Risk-Based Assessment System for Large Insured Depository Institutions. This paper explains how to align credit scoring models with PD. VantageScore senior vice president Sarah Davies also conducted a webinar on the new rules and their implications for risk managers.
VantageScore 3.0 debuts
In March 2013, almost seven years to the day after the launch of VantageScore Solutions, LLC, the company introduced the VantageScore 3.0 credit scoring model. The model built on the strengths of its predecessors, and drew extensive news coverage for its ability to score 98 percent of adult consumers in the U.S. (including 30-35 million who cannot get scores from conventional credit-scoring models); its disregard of paid collections (including paid medical debt); and its simplified reason codes. In response to research among lenders and consumers, the model also adopted a 300-850 scale range.
The company also re-launched the VantageScore brand with a new logo, a bold orange-and-white color theme, and an all-new online presence, including a redesigned VantageScore.com; a consumer-oriented companion website, yourVantageScore.com; and ReasonCode.org, a site designed to help consumers better understand the automated explanations that accompany scores issued by lenders.
The lending universe expands
Lenders and industry media outlets alike showed great interest in a research paper by the VantageScore analytics team, which shed light on the 30-35 million consumers who are unable to obtain credit scores using conventional scoring models, but who can be scored using the VantageScore 3.0 model. Published in March 2014 and titled Universe Expansion: Is the Way You Score Customers State of the Art or State of Denial?, the paper showed that these newly scoreable consumers exhibit payment-default behaviors very similar to those of the conventionally scoreable population; that approximately 9.5 million of them are Hispanic- or African-American; and that nearly 10 million of them (including roughly 2.7 Hispanic- and African-American consumers) have scores of 600 or greater.
2015 GSE scorecard
In January 2015, the Federal Housing Finance Agency (FHFA), the agency that regulates Fannie Mae and Freddie Mac, announced that its 2015 scorecard—the list of goals for each of the so-called government-sponsored enterprises (GSEs), would include assessing “the feasibility of alternate credit score models and credit history in loan-decision models, including the operational and system implications.”
This welcome news followed years of advocacy by VantageScore Solutions against the “GSE Lockout”—that is, requirements by Fannie Mae and Freddie Mac that lenders submitting mortgages for purchase through the GSEs’ automated approval systems must include borrower credit scores using specific, 1990s-era FICO credit scoring models.
The GSEs are responsible for financing the vast majority of single-home mortgages in the U.S., and these requirements effectively grant FICO a monopoly on credit-scoring in the U.S. mortgage market. The FHFA-mandated assessment of alternative scoring options offers hope for credit-scoring competition in the mortgage marketplace. A directive in the FHFA 2016 scorecard that calls for Fannie and Freddie to “conclude assessment of leveraging alternate or updated credit scores for underwriting, pricing, and investor disclosures and, as appropriate, plan for implementation” is also cause for guarded optimism.
2014-15 market adoption
In late 2015, VantageScore Solutions disclosed that more than 6 billion VantageScore credit scores were used from July 2014 to June 2015 by more than 2000 lenders and other market participants. That figure represented an increase in usage of more than 100 percent over the previous 12-month period. Users of the VantageScore credit scoring model included seven of the nation’s largest banks.
The 2014-15 timespan also saw the completion of securitization deals in which VantageScore credit scores were used to evaluate portfolio risk. Both Standard & Poor’s and Kroll Bond Rating Agency rated pools of consumer loans underwritten using VantageScore credit scores without bias.