With the U.S. mired in a recession and unemployment at its highest level since the Great Depression, many lenders have turned off the credit spigot for all but the most qualified borrowers. So despite record-low mortgage interest rates, many would-be home buyers have been left frustrated.
A new credit index released by Fair Isaac Corp. this week could change that, potentially making it easier for borrowers to score a loan. The company also produces the widely used FICO credit score.
The FICO Resilience Index is intended to help lenders assess the ability of a borrower to withstand an economic downturn—even those with lower credit scores. It was designed to encourage lenders to continue making loans without raising minimum credit score requirements and other criteria. Lenders can use the score produced by the Resilience Index in addition to the regular FICO score.
“Our hope is that it will allow lenders to continue to be able to make prudent loans," says Joanne Gaskin, vice president of scores and analytics at FICO. "Lenders are going to feel more comfortable continuing to approve borrowers rather than denying" them.
During the last recession, millions of consumers with lower credit scores still met their financial obligations, according to the company.
"It's a step in the right direction," says realtor.com Senior Economist George Ratiu. "Just one number, the traditional FICO score, shouldn't be the sole metric in determining a borrower's ability to repay a loan."
Lenders are a bit skittish given the economic climate. Credit scores do not reflect whether homeowners are receiving mortgage forbearance because of pandemic-induced hardship.
"For a lot of lenders in the current environment, the FICO score is not a clear indicator of a consumer’s current financial health," says Ratiu.
The new FICO score could relieve some of their concerns. It will place less weight on missed payments and more emphasis on lower account balances and credit utilization, says Gaskin. It does not factor in how much money someone has stashed in their savings account.
"It makes sense that these are consumers who have a cushion going into an economic downturn," says Gaskin.
But the new scores may not benefit everyone equally—which could be especially hard on people of color, says Stephen Ross, an economics professor at the University of Connecticut. He is also co-author of "The Color of Credit: Mortgage Discrimination, Research Methodology, and Fair-Lending Enforcement."
"It will certainly change who gets loans in a recession," says Ross. "We know minority borrowers tend to have bigger income losses and more periods of unemployment during economic downturns."