Banks Seek Lower Credit Score Requirements, Targeting Over 50 Million New Subprime Borrowers

When the next bubble burst happens - and it will - be sure to take a look back at this article. It might help explain some things. 

Lenders, seemingly unhappy with the vast avalanche of debt they've issued over the last decade, are now looking to "move the goalposts" in order to be able to lend even more money to even less creditworthy individuals, according to the Wall Street Journal

Gone are the old days of relying on a consumer's borrowing history to determine creditworthiness and here are the days when magazine subscriptions and phone bills will factor into how much should be lent to potential borrowers. Banks like Goldman Sachs Group Inc., Ally Financial Inc. and Discover Financial Services are now experimenting with the new metrics. 

The changes are major for many large banks, who primarily spent the last 10 years targeting only extremely credit-worthy borrowers. But, as we all know too well, when that pool runs out, the show must go on by any means possible. And this is the thinking that leads us to things like no-doc loans and subprime CDOs.

The banks are targeting the estimated 53 million U.S. adults that don't have credit scores and the 56 million that have subprime scores. The banks argue that many of these people don't have traditional borrowing backgrounds, often times because they pay in cash or are new to the U.S. 

And the timing couldn't be any better: U.S. consumer debt is higher than ever, as Americans continue to borrow in order to finance everything from cars, college, housing and medical care. 

Government officials have also encouraged, at times, changes to the information in credit reports and scores so that loans could be made to "deserving borrowers" who don't fit a "traditional mold". You know, like people that have the means to pay back their debt. 

Banks like JPMorgan Chase & Co., Citigroup Inc., American Express Co. and Capital One Financial Corp. have all been considering talking to FICO about whether incorporating new data into credit scores could help boost loan volume. Lenders have also been pleading with Experian for ways to find new customers who are more financially responsible than their credit scores suggest. 

Goldman Sachs started making personal loans in 2016, as part of a larger move to consumer banking. A spokesperson for the bank said it has “built a technology and data architecture that can ingest and use multiple sources of data to make the best decisions for the customer and the bank.”

The entire lending industry revolves around customer data and FICO scores. Dossiers are compiled on borrowers and the data is condensed through a score between 300 and 850. Last October we reported on FICO's announcement of its "Ultra FICO" score that rigs factors in how applicants manage cash in their checking and savings accounts. And why wouldn't FICO offer another score? About 37% of their revenue comes from the credit scores that it sells. 

TransUnion also says it sells alternative data to U.S. lenders. Mike Mondelli, SVP, said: "It's an indicator of stability."

Yeah, for your top line.

Critics state the obvious: the new scores could make tons of non-creditworthy borrowers look as though they are creditworthy when they aren't. Other critics point out that a borrower's propensity to pay bills necessary to live, like electric and water bills, don't help distinguish whether or not they are likely to pay back unsecured debt. 

And us? We remind these banks that those who fail to learn from history are doomed to inevitably repeat it.