While the US credit scoring market is well-established in terms of product acceptance, loan processing efficiency, and decisioning speed, lenders increasingly require better stratification of consumer credit risk than current scoring provides.
More nuanced credit stratification is of particular concern as financial institutions increasingly target "underbanked" and "unbanked"
consumer segments, and grapple with skyrocketing defaults and losses in the subprime lending sector.
As lenders look to penetrate new market segments, update underwriting and pricing policies, and adapt credit risk evaluation to shifting market conditions, research from TowerGroup encourages lenders to evaluate new custom credit score options. Lenders need better scoring that serves low and moderate income loan applicants, including those that have little or no traditional credit history tracked by the credit bureaus. Lenders also need scoring solutions that better determines whether consumers are of subprime or prime credit quality.
Over the past few years, the traditional consumer credit reporting and credit scoring market has been evolving with the development of the consumer-direct customer segment (consumers purchasing their own credit reports and scores) and the introduction of alternatives like the VantageScore by Equifax, Experian and TransUnion, the Anthem Score from First American Corporation, and the FICO Expansion Score from Fair Isaac Corporation.
TowerGroup estimates that the consumer-direct customer segment for credit reporting and scoring products will grow 39% between 2001 and 2010. This represents a larger growth opportunity than the traditional lender credit score market.
Lenders are evaluating VantageScore to determine if it provides better predictability of loan performance. Initially, TowerGroup believes VantageScore will have moderate success in the consumer-direct and credit card lending market segments, but will have difficulty gaining ground among the mortgage and home equity lenders. This is due to the challenges for lenders related to testing and implementation costs; significant policy, operational, and training changes; and general institutional resistance to change.
The new TowerGroup report titled, "What's the Score? New Risks, Credit Scores, and Revenue Opportunities in US Consumer Credit Markets," is authored by Craig Focardi, research area director in the Consumer Lending practice at TowerGroup. The research examines VantageScore, how to understand its potential growth in the consumer-direct segment, and how to asses its impact on lenders' interactions with consumers during the loan application and underwriting processes.
At TowerGroup, Focardi's research focus area is mortgage and consumer lending. He covers a wide range of business, process, strategic, and technical topics relating to loan origination, loan servicing, securitization, and risk management.