Besides helping more consumers qualify for loans or better rates, the change benefits the financial industry with a better reflection of a borrower’s real payment behavior.
New York (PRWEB) November 11, 2014
Strategic Consulting Services (http://www.strategiccs.org), a New York firm providing financial advisory services for consumers, warns that FICO 9 changes which could potentially help millions of Americans with credit problems is years away from full industry adoption. The new lending calculation policies have been announced but may not be applied to mortgages until next decade.
Fair Isaac Corp. in August this year announced a significant change to its FICO Score, the leading credit score model used by lenders and creditors, Due to be released this fall, the modification would change how the model accounts for medical debt collections. The impact of a consumer paying a bill in full or settling the debt would improve a credit score, giving debtors more incentive to repay debt. Previously, if a borrower didn’t pay a bill, their credit score would have been negatively impacted regardless of how they repaid the debt. This announcement came as good news as medical collections can be damaging to credit scores and has become a growing trend on the credit report of average Americans.
While the FICO 9 changes may be incorporated in the next year by automotive and other lenders, mortgage lenders are most likely three to five years away from using the new model. The two largest players in the American mortgage business, Fannie Mae and Freddie Mac represent the main delay in the adoption process. Investigation by Housing Wire has confirmed that Fannie and Freddie are currently using FICO4. The organization that oversees Fannie and Freddie, Federal Housing Finance Agency, has released its goals through 2017 and they do not include FICO changes.
The change for the average American is an incentive to repay or settle medical debt, rather than avoiding it or declaring bankruptcy. Over the life of a 30-year loan, even a small improvement to a credit score could equal thousands of dollars – or save an applicant from a loan rejection. America’s repayment of medical debt has become a problem with health care ranking as the number one reason for bankruptcy in the United States. In the U.S. as of July this year, 64 million consumers had a medical collection on their credit report. Medical debt usually is not planned for, with large bills that are outside of one’s control.
While slow adoption of FICO 9 may be a disappointment, there is hope for expedited change that could come from the proposed Fair Credit Reporting Improvement Act of 2014. Bringing sweeping changes to how consumers’ credit reports are calculated, the proposed Act would require Fannie and Freddie to review and update their lending policies and models. The Act would also make the medical debt calculation changes from FICO 9 as an update to the nearly 45-year-old Fair Credit Reporting Act (FCRA).
“These changes are important and should be expedited. Besides helping more consumers qualify for loans or better rates, the change benefits the financial industry with a better reflection of a borrower’s real payment behavior. Since medical debt isn’t planned, like a car purchase, it should be treated differently so lenders can target lending more accurately and make better informed loans,” says Ben Kittle, Senior Financial Consultant at Strategic Consulting Services. ”These are changes with relatively small impact for lenders but potentially big impacts for the individual consumer.”
About Strategic Consulting Services
Strategic Consulting Services is a financial services firm with teams specialized in Debt Management, Mortgages and Business Services. With a comprehensive client-focused approach, the Company provides assessments looking beyond immediate financial issues to help clients build greater financial strength with smart habits and choices. Since 2007, Strategic Consulting Services has helped individuals and small businesses create savings plans, reduce debt, and make wiser spending choices. For more information visit http://www.strategiccs.org.