A case study that makes the case for more inclusive credit scoring models

Date: September 28, 2021

Dear Colleague:

Early on in my tenure as president & CEO of VantageScore Solutions we attended many meetings and conferences with credit unions. Broadly speaking, credit unions have a reputation for filling in the lending gaps that larger financial institutions either ignored entirely or felt didn’t provide the right return on investment.

Logically, our thinking was that a more inclusive credit scoring model would be a tool that credit unions could easily adopt which would enable them to lend to more members and even expand their membership base.

We found that despite the clear value proposition, most credit unions lacked the ability to migrate from one scoring system to the next. Often they were reliant on third-party vendors that relied on legacy systems and models.

Since then many credit unions have switched to VantageScore.

But what I found very interesting and resonating was a study released earlier this month from the Filene Research Institute entitled, “Beyond Legacy Lending: Strategies for Loan Growth and Inclusion.”

The qualitative study was based on interviews with chief lending officers at a number of credit unions “seeking to grow responsibly and advance inclusion through more calculated and innovative lending," - a noble effort if I’ve ever heard one!

Despite their desire to open their credit box to more underserved consumers, they cited a few hurdles. To set-up this predicament, excerpted below is a Q&A that sums up lending executives' frustrations:

Q: Do you have a sense of the profile of an average borrower at your credit union?

A: It’s depressing. A+ and A basically.

Q: Okay. Can you put that in context for me?

A Yeah. Very, very clean credit. Not a lot of difficulty affording loans. We have a conscious effort to move down in the credit tiers, but we haven't been as successful as I would like there yet.

The obstacles that they cited are as follows:

  • Parsimony bias- “refers to the preference both for an uncomplicated, straightforward system and for one that is functional without being needlessly resource intensive.”
  • Doubting the return on investment (ROI)
  • Other technological priorities

I don’t think these hurdles are necessarily only applicable to credit unions. Inertia and competing priorities plague many institutions and prevent them from achieving their goals.

In this current environment, ignoring opportunities to change system processes that have historically had a negative impact on underserved borrowers simply is not acceptable.

The good news is that things like cloud computing, more easily accessible data, application programming interfaces (APIs) and data security innovations make migrations much easier and less disruptive. However, we must implore others to take it one step further and use tools that will predictively and safely expand their credit box. And, of course, VantageScore stands at the ready to help credit unions and other financial institutions create more opportunities through more inclusive credit scoring models.

I commend the research and the lending officers who participated in it for their frankness and situational analysis.

Regards,

Barrett

CEO and president, VantageScore Solutions

P.S. Please be sure to join us TODAY (Tuesday, October 28th) @ 10:30am EST as our own Dr. Sahingur headlines the opening general session "Industry Update + Credit Trends" at MBA's Risk Management, Quality Assurance and Fraud Prevention Forum. For more information and to register: CLICK HERE.