Post-recession strategies shrank borrower pool, but not risk

Date: June 25, 2020

Steps many lenders took to prevent additional losses after the 2008 recession shrank their universe of creditworthy borrowers without reducing lending risk, according to the latest VantageScore Solutions white paper, Maximizing the Credit Universe.

In the wake of the Great Recession, many financial institutions supplemented quantitative, credit score-based lending criteria with qualitative requirements intended to reduce lending risk. These included greater scrutiny of past bankruptcies; insistence that potential borrowers have “thick” credit files—i.e., that they had at least three credit accounts active within the past six months—and requirements that borrowers have credit files at all three national credit reporting companies (CRCs): Equifax, Experian, and TransUnion.

The VantageScore Solutions white paper exposes a fallacy in the assumptions underlying these practices—that for any given consumer, a higher volume of credit-file information automatically equates to a more accurate risk assessment. In fact, the study shows, these additional qualitative practices reduce the universe of potential borrowers by as many as 80 million consumers nationwide, without any reduction in credit risk.

The VantageScore Solutions white paper contrasts the “credit-eligible universe,” of consumers who can be considered for loans with each lender’s “credit-accessible universe” i.e., the pool of consumers the lender actually considers as potential borrowers. The white paper details ways in which a lender’s practices and policies can unduly shrink its accessible universe—by as many as 80 million consumers nationwide.

In addition, the white paper presents a case study that illustrates how lending strategies that include modern credit-scoring models can maximize the universe of potential borrowers within a lender’s specific risk requirements, without relaxing credit standards.