“Borrowers’ scores may have migrated up, but inherently their individual risk, and their attitude towards credit and ability to pay their bills, has stayed the same.” deRitis said. “You might have thought 700 was a good score, but now it’s just average.”
Big banks and lenders have been savvy enough to recognize the problem and include many other factors besides credit scores in their underwriting. This is probably true for some of the smaller lenders too.
FICO acknowledges that the credit score alone may not be enough to make informed underwriting decisions, and other factors need to be considered.
“The relationship between FICO score and delinquency levels can and does shift over time,” said Ethan Dornhelm, vice president of scores and predictive analytics at FICO. “We recognize there’s a lot more context you can obtain beyond a consumer’s credit file. We do not think that score inflation is the issue, but the risk layering on underwriting factors outside of credit scores, such as DTI, loan terms, and even trends in macroeconomic cycles, for example.”
But according to Goldman’s Young, the change in scores helps explain why missed payments on auto loans have significantly risen in recent years despite low unemployment, increasing wages and a relatively strong economy.
In February, the Federal Reserve Bank of New York said the number of auto loans at least 90 days late exceeded 7 million at the end of last year, the highest total in the two decades that the data has been tracked. Meanwhile, the subprime segment of auto-loan asset-backed securities has seen 30-day delinquencies rise 81 percent since 2011, driven by looser underwriting due to rising competition between lenders, according to S&P Global Ratings.
“Some deep-subprime auto lenders may be deeply reliant on credit scores, although there’s a pretty wide range within the auto industry of how lenders use scores and other metrics,” Michelle Russell-Dowe, who invests in consumer asset-backed securities at Schroder Investment Management, said. “For marketplace lending, regardless of the statistics you collect on borrowers, there is something adversely selective about somebody looking for loans online.”
Marketplace lending -- loans handed out online -- has been flashing signs of stress. Missed payments by consumers and writedowns for online loans bundled into bonds increased last year, according to PeerIQ, a New York-based provider of data and analytics for the consumer lending sector.
“We don’t see the purported improvement in underwriting just yet,”’ PeerIQ wrote in a recent report tracking marketplace lending.
Russell-Dowe also avoids the retail credit card sector. So-called private label credit cards -- those issued by stores, rather than big banks -- saw the highest number of missed payments in seven years in 2018, according to credit bureau Equifax.