Twenty or so years ago Experian and FairIsaac were paid by USAID to help build credit bureau infrastructure in Kazakhstan.
USAID also paid their legal departments to help draft a law which would govern the whole process.
And guess what, in the result we got much fairer, more efficient, far more future-proof infra than the US has today.
Gov licenses credit bureaus and runs its own one.
Banks must report to all licensed bureaus and may choose which bureau to pull reports from. This means a report from any bureau is as good as from any other one.
Having a gov player in the market effectively creates a price ceiling, so a private bureau has to sell data for less than the government-run bureau.
Private bureau has to keep innovating to justify its existence and thus keep creating new products which predict creditworthiness better and better.
Credit report includes all the raw information, so banks are free to compute their own score and are not bound to anything stupidly archaic and awkward such as US FICO score, don't need to rely on any external score at all.
It is the XXI century, computing a credit decision out of a few hundred datapoints takes milliseconds, costs nothing.
So gov-run bureau sees a fraction of a % of the load yet effectively moderates the whole market.
The largest private bureau is owned by banks (like VISA used to be) and thus is working in the best interests of the banks.
Many (if not all) problems we see in the US financial sector are the result of regulatory and legislative negligence. Just some lazy folks trying to run things the way there were in the 80es.
A lot of things in the US would change for the better if we installed a new government for ourselves using the techniques we have when we assist or replace foreign governments.
There’s a ton of stuff we have and do, including some fundamental stuff (our system of voting, for one) that’s known to be really bad compared to the “state of the art”. But, in part because of some of those bad elements, we only ever get to apply better solutions for others, never ourselves.
The Electoral College exists as a compromise regarding two needs:
* The need to keep the Executive and Legislative Branches separate.
* The need to represent States in a manner they already agree with, for sake of brevity.
Thus the Electoral College: Composed in the same way as Congress is (plus pretending D.C. is a state) whose sole task is electing the head of the Executive Branch as representatives of the States thereof.
Japan (and Germany? I don't know enough about German politics) is based on the UK's Westminster system, which has its own pros and cons and isn't necessarily better.
The idea of choosing wise locals to go judge the candidates and choose on our behalf (since a general election for president is kinda crazy—they were right about that) fell apart pretty much instantly when we started actually holding elections, making the institution all but pointless except for presenting opportunities to attack our democracy with weird procedural shit because it’s more complicated than it needs to be (see, ahem, certain recent events).
We don’t need the College to weight the vote toward states without people in them, if that’s what we want to do. Even if we accept that that’s a good goal, the College is not a good way to do it.
The thing is it's not the citizens of a State choosing the POTUS, it's the citizens of a State choosing which candidate their State will choose for POTUS.
Remember, the US is a federation of sovereign States and POTUS as Chief Executive of the Federal government represents and is chosen by the States thereof. Each State represents its citizens respectively.
The reason the College gives more weight to less populous States is, again, the need to represent States at the federal level in a way they already agree with but separated from the Legislature. So each State gets 2 Electors plus at least 1 Elector according to their population, representing the Senators and Representatives they would have in Congress. Remember that the Senate gives equal representation to all States regardless of population; California and Rhode Island each have the same representation in the Senate.
Part of the reason Japan doesn't have an Electoral College is because they aren't as concerned about separating the Executive and Legislative Branches and they aren't a federation of sovereign States.
> Remember, the US is a federation of sovereign States and POTUS as Chief Executive of the Federal government represents and is chosen by the States thereof. Each State represents its citizens respectively.
This isn’t even accurate from the perspective of 1789. The articles of confederation created a model akin to what you’ve outlined. The constitution created a quasi blend of popular representation and state level representation in the federal government as a result of several different compromises in order to form a stable national government.
That isn’t how anything effectively works today though. The federal government has undergone numerous reforms both explicitly within the constitution and implicitly without any formal constitutional changes. These include the direct election of senators, income taxes, etc but also the effective binding of presidential electors to the outcome of the popular vote within a state.
Americans today don’t think of themselves as citizens of the state of California, they think of themselves as Americans solely, the former concept being absolutely foreign and strange to them.
Finally, the EC gives very little benefit to small states. The relative impact is consistently overstated. The only place that small state over representation effectively exists is in the senate.
>This isn’t even accurate from the perspective of 1789. The articles of confederation created a model akin to what you’ve outlined. The constitution created a quasi blend of popular representation and state level representation in the federal government as a result of several different compromises in order to form a stable national government.
The Constitution vests all powers with the people, and certain powers are delegated to States at the pleasure of the people. The States in turn delegate certain powers to the Federal government at the pleasure of the States.
While it certainly looks the other way, the hierarchy of political power in America has always been People > States > Federal.
The Constitution also mandates separations of power between the three branches of government, unlike say the Westminster system where the Legislative branch elects the Chief Executive at their pleasure.
>That isn’t how anything effectively works today though. The federal government has undergone numerous reforms both explicitly within the constitution and implicitly without any formal constitutional changes. These include the direct election of senators, income taxes, etc but also the effective binding of presidential electors to the outcome of the popular vote within a state.
Indeed, and States Rights vs. Federal Powers continues to remain a hot topic because both sides want more power.
Incidentally, the legal requirement for electors to follow the election result of their State is decided by each State. Most States have this law, but some do not. The Constitution explicitly gives the States this authority, not the Federal government.
>Americans today don’t think of themselves as citizens of the state of California, they think of themselves as Americans solely, the former concept being absolutely foreign and strange to them.
Is it? There are memes about Californians and Floridians, not to mention stereotypes of New Yorkers and Texans among others and otherwise simple pride in your home state (particularly prevalent among servicemen and veterans).
The National Guards of each State are also rooted in the concept that each State is sovereign and will have a military force legally independent from the Federal military force.
>Finally, the EC gives very little benefit to small states. The relative impact is consistently overstated. The only place that small state over representation effectively exists is in the senate.
The benefit to smaller States in the EC is nearly if not perfectly identical to that in Congress because apportionments are deliberately identical.
> The States in turn delegate certain powers to the Federal government at the pleasure of the States.
This is blatantly false. The constitution explicitly states that that it draws its power directly from the people “we the people” in the preamble. From the the supremacy clause explicitly states that the constitution is the fundamental law of the land, and that the heiarchy from there is federal law, treaties and then state law. The caveat being that the federal government is delegated limited, enumerated powers by the constitution.
Here's the thing though: The Constitution and amendments thereof are (re)written and ratified by the States at the States' pleasure, which answer to the Peoples of the States respectively. The Federal government cannot modify the Constitution by itself, it's at the mercy of the States and their Peoples.
Thus the pecking order: People > States > Federal.
The People can demand their respective States to modify the Constitution as desired to (re)define the powers delegated from the People to the State and Federal governments.
The states didn’t write nor did they ratify the constitution (it was done at special conventions separate from the state governments themselves), nor do they write amendments.
I honestly don’t know what to tell you at this point. This is basic constitutional history and legal theory, the federal government draws its authority directly from the people.
Regardless of whether Congress or the States pedantically write new amendments, they must be ratified by 3/4ths of all States in the Union. Ergo, the States ultimately write what goes into the Constitution, and the States answer to their Peoples respectively.
The Constitution itself was also ratified by 9 of 13 States to start.
Congress and thus the Federal government cannot modify the Constitution by themselves, they serve at the pleasure of the States.
The actual electors are basically pointless though. You can assign the electoral votes however the states decide to (some split it, et c) and that’s that. The rest is risky pageantry (and not even an entertaining sort!) and has been very nearly since day 1. The human electors have never really functioned like they were supposed to.
I agree that the electors being actual people are mostly an artifact of a bygone era at this point. It's even illegal in most States for an elector to vote contrary to what the State's citizens decided.
That being said though, Congress still has authority to act as a failsafe in the event the College deadlocks and Congressmen are most definitely actual people, so maybe there is some obscure value left in Electors likewise being actual people.
In the interests of Chesterton's Fence and Not Fixing What Ain't Broke(tm), so long as the human nature doesn't become a significant problem it's probably not worth checking out the consequences of changing things around.
> That being said though, Congress still has authority to act as a failsafe
The irony is that, as originally envisioned, what seems like a failsafe now was how they thought the election would be decided. The EC was just supposed to be a filter, the final election was Congress voting as state blocs. The framers didn’t see the party system coming though.
> Not Fixing What Ain't Broke
If there’s one thing that Americans can generally agree on, it’s that things are definitely broke, just maybe not the particular thing that is broken.
Having too much rigidity in a system is how things end up collapsing out of nowhere. As stated in my prior comments, there’s actually been a significant amount of change and adaption in the constitutional order since 1789, it has just been implicitly down rather than explicitly so in the form of constitutional amendments.
You’re just making my point, it was a compromise for the time that no sane person would include in a country or constitution started from scratch today. There’s a reason no other country on earth uses such a ridiculous system. It is just tech debt we have to live with.
The “need” for the EC is all post hoc rationalization at this point. It was an expedient political compromise made in an environment that is wholly different than the one we live in today.
The only reason we maintain it now is because it is both too hard to change and also perceived (correctly or incorrectly) to give an advantage to one of the two major parties in our political system, which effectively kills their support.
The “friendlier” nation-building stuff, from being invited to help (as in the original example) to installing new states in countries we’ve conquered (you see now why the quotes on “friendlier”).
Less so the coups. Usually with those we just want some degree of fealty or alignment. Dictators are easier to predict and control in that way, and one fuck of a lot cheaper to install than a functioning democracy.
From what I gather in the Federalist Society Papers, the original intent was that we would reinvent our country every 25 years or so, draft a new constitution and incorporate all of the changes that we needed to continue to function with the precept of being a great society, "Of the people, by the people, for the people".
However, requiring 100% of states to affirm the new constitution was difficult enough in 1776 when there were only 13 states and they all had a common enemy to band together against.
Doing that now would probably be impossible or require antilogic so extreme no human could read it without their ears bleeding from the brain hemorrhage.
> From what I gather in the Federalist Society Papers, the original intent was that we would reinvent our country every 25 years or so
I think you are confusing in name the Federalist Papers with the modern and, except in attempt to steal glory, unrelated Federalist Society, and confusing in substance the Federalist Papers with a letter written by Thomas Jefferson to John Adams in which he expressed the conclusion that all laws (incl. Cobstitutions) must, based on then-current actuarial data, sunset in approximately that timeframe to avoid the living being ruled over by the dead.
Just to be pedantic: constitutional amendments, in the USA, require a maximum of 75% of the states to agree. Minimally 66.6% (repeating, of course) of them to call a constitutional convention, and ratify the results.
None of that challenges your important points about the intentions of the founders, nor the difficulties upon which their project has run around.
I think the idea is in good spirit, but it's important to be aware that gov backed services often run at a loss indefinitely. It's impossible to compete with a business that doesn't need to make money to exist. So you end up with just the government service.
I see why you have this assumption, yet we have 20+ years of data proving that a private bureau can actually compete, flourish and innovate while serving majority of the reports while gov-run bureau ensures that prices stay manageable.
In many areas, the notion of government services operating at a loss doesn't make sense - police, fire department, armed forces, libraries, parks, etc.
None of those are links in a chain of private markets. They are their own government monopoly markets.
If the government is going to become the defacto credit rating agency, they might as well be the defacto lender. Obviously loan rejections and low scores will be unpopular and an easy lever to push on for more votes, so just ditch the credit ratings all together and have a government lender that lends taxpayer money for all loans at a flat-rate.
Which basically has happened already - student loans - and we all know what a rosey picture that is.
That is incorrect, those are not government monopolies, those spaces have private options.
FedEx, DHL, UPS and government USPS
Parks - there’s a ton of types with equivalent public and private versions
Police - private security
Firefighters - there are private fire fighters who protect houses threatened by wildfire - they just don’t need to respond when it comes to responding to stuff like traffic accidents and health incidents
That’s not comparable, that analogy is like saying I have a backyard so there’s no government monopoly on parks. It’s not like saying there’s a private tennis club and public tennis courts, or whatever other typical park amenities.
That flawed analogy is like saying I have a baton so police aren’t a monopoly on protection, when my analogy actually was private security companies.
> Even if a lender thinks the customer would be a good risk, the lender has to buy a FICO score regardless.
This isn't completely correct. For a period I had no FICO score, yet I was able to secure a loan from a Credit Union. It did require me to show my assets and income flow, but the Credit Union was able to provide me with a loan.
The score from what I have gathered when I learn really rewards those who remain in debt and pay substantial interest, not the frugal and financially stable (check to check is not financially stable). Basically encouraging to keep self in debt just at the edge of financial disaster's precipice.
> ... FICO prohibits not only validating different models against FICO scores, but even displaying FICO scores next to non-FICO scores. ...
> ... all three bureaus plus FICO have massive pricing power.
> ... come to a set of arrangements to jointly hike prices
This cartel will never be broken up. Too much money goes into the politicians pockets to move for break-up.
> For a period I had no FICO score, yet I was able to secure a loan from a Credit Union.
The credit union was content to use its own capital and hold your loan to maturity on its books. (I'm presuming you were probably a banking customer of the credit union, though I realize not necessarily.)
Non-credit union lenders though most often want to either sell your loan to investors or pledge it as collateral to borrow money for themselves, and for that they need a FICO.
> The score from what I have gathered when I learn really rewards those who remain in debt and pay substantial interest, not the frugal and financially stable (check to check is not financially stable). Basically encouraging to keep self in debt just at the edge of financial disaster's precipice.
That's not really true. Using a credit card for most of your expenses and paying it off in full every month is actually a great boost to your credit score. It's both an indication that you live within your means and you honor your agreements.
Meanwhile paying down my debt faster than I'm supposed to often leads to my score dropping a few points. I've also lost dozens of points for closing rarely used accounts to reduce my financial attack surface. It's all bullshit. I was in the mid 700's while struggling my ass off with debt only to drop into the high 600's for cleaning up my debt habits.
Revolving accounts like credit cards using them each month and then paying them off is good for your score, fixed accounts like mortgages, car loans, etc, when you pay them down/off, the amount of credit you have drops with the balance, and once it is paid off the account is closed, so it actually drops your score. If you don't use a credit card (and increasingly for me, if I don't use a card enough) the issuer will likely close the account or reduce your available credit, which will reduce your credit score...
So yeah, it is a pain in the rear to maintain a very high credit score.
Most government securitized backed mortgage loans (which has 70% of the market) require a credit pull. Private or direct lending can have a different set of lending standards. From FNMA...
>Credit scores are required for most loans purchased or securitized by Fannie Mae. The classic FICO credit score is produced from software developed by Fair Isaac Corporation and is available from the three major credit repositories. Fannie Mae requires the following versions of the classic FICO score for both DU and manually underwritten mortgage loans:
Equifax Beacon® 5.0;
Experian®/Fair Isaac Risk Model V2SM; and
TransUnion FICO® Risk Score, Classic 04.
>The score from what I have gathered when I learn really rewards those who remain in debt and pay substantial interest,
Way back when, getting my first credit card was difficult--although there are a lot more credit options today.
But, at some point, you absolutely do not need to be in debt to have a good credit score. I guess technically, if you use credit cards and pay them off every month without paying any interest, you're in debt all the time but that's not what most people mean by "debt."
I guess from a certain point of view you're right, a credit score is a list of all the debts you've had an how you've paid them back.
So somebody with no debt is "unknown", rather than the expected "good".
In Finland we don't have credit scores, instead we allow looking up defaults. Which seems like a reasonably sane approach - known-bad borrowers find it hard to repeat that behaviour, and somebody with no history of taking loans/debts isn't penalized.
> In Finland we don't have credit scores, instead we allow looking up defaults.
There is also the newly established The Positive credit register which contains list of all of your debts. Lenders must pull (started in April 2024) the information from there when they are making the decision to grant or deny the request. The report also contains your income for past 12 months (I assume those reported to Income Register). I'm not sure if there is regulation on if they actually need to use the data or not.
Right. There is certainly a component of risk in the models but there’s also “how valuable a credit consumer are you”.
Which is why things like closing accounts or paying loans early actually hurt your score. CRAs and their advocates say “we lost a datapoint so our uncertainty increases”, acting as if that historical data has no value.
When I was applying for a mortgage and my credit was as “clean” as it has been (balances, accounts, etc.) Verizon filed a collection over what was a fraudulent account. Score dropped 140 points. In the course of three business days that collection was deleted, and my score went back up… 50 points.
Multiple factors, I know, but that also makes me think that even some of those deleted trade lines and delinquencies and others are still floating around and factoring in.
I would point out that "400% increase in mortgage credit check fees" sounds probably a lot worse than the actual number - which is like.. $150 at the time you are getting a mortgage. Of all the fees associated with buying your average $400k home, I don't think the $150 credit check fee is the big pain point.
Title insurance is a much bigger scam/cost. The various state & local taxes at closing are orders of magnitude higher. Not to mention brokers fees (which are somewhat being handled as of late).
Title insurance could be safely eliminated with something called the Torrens title system, it was tried in the US but never took off outside of Guam. The issue comes from the lack of any definitive record of property ownership, raising the possibility that challenges may be raised in court in the future that weren't known to the buyer.
> Only one out of every ten prospective customers ends up taking out a mortgage, so higher prices fronted by mortgage bankers add up
I read this as for every ten customers who get to a point where they get their credit pulled, only one of them end up closing on the mortgage (ie buying a house). Could be due to shopping around, negotiations falling through, or the other millions of reasons you could end up wanting to buy a house but not close the transaction.
I wouldn't cut out Title insurance, I have two friends for whom it saved low 7 digits each due to fraud in one case and liens in another.
It's incredibly important in today's market and I can't see how you can call it a scam, unless you also view car/health/life insurance as a scam as well, in which case we just disagree:)
It could be handled with a government maintained database for orders of magnitude less resources. There should not be giant title insurance buildings in every city.
Ok, so if someone impersonates me and sells my home and runs off with the money this is one scenario that title insurance covers my losses. How does a government database help in this case?
This is a scenario that happens more often than you'd think with empty condos and a foreign owner who isn't around to look after their property.
You'd still need title insurance even though you have a "government maintained database"
That scenario is in fact not covered by title insurance. Title insurance would be for the schmuck who bought your house.
I'm not saying that the function of title insurance companies would go away, but it would largely be obviated by an accurate single source of truth for land titling, and yes some insurance function that the government could provide for a much smaller fee.
It is indeed covered as I've had a personal friend have to use it for that reason. The buyer got to keep the house and the old owner had title insurance pay them for the loss of their home.
I think what parent actually means is that there are better solutions for it than insurance. E.g. a central registry of ownership and liens would probably solve 99% of the cases that you need insurance for. The insurance is a scam in the way that there are technical solutions that would obviate the need for this "service", but that solution is against the interests of the service providers. Very much like tax returns, which are a solved problem in many countries for the majority of the population because the authorities already have all the data they need. Most people should not need to faff around with them. In the US however, the tax return lobby is strong and effectively prevents the government from making it easy...
In those cases where the government handles recording all transfer, there is typically a fund which covers loss due to fraudulent or erroneous transfers. Thus there is still title insurance, it's just hidden from view.
A lot of Americans would rather pay $1000 to a private service than $900 in higher taxes. It's the principle of the matter. Government bad. Privatization, "choice" between the oligopoly businesses, and public-private partnerships good.
In the US, it's unrealistic to assume there's a canonical federal database which tracks every potential title complication including property tax liens at the local level. In my case, I had a (resolved) issue where the property/house I was buying was a subdivided larger property with an agricultural lien (for an apple orchard) that hadn't been lifted yet.
Titles have a lot of opportunities for complications in many places; there's no simple technology fix.
The insurance is annoying but it's an area that has the potential for really expensive issues.
I'm definitely no expert on the law in every state, but from the states I know of there are central appraisal districts in charge of real estate tax appraisals. They already have to keep track of ownership of properties and their tax assessments, might as well just expand their domain to also include lien registries as well.
I totally get it would be quite a mess and complication and issue with federalism to have the federal government have a single database, but at least having real databases somewhere that can be publicly queried would be a massive step forward towards making title insurance no longer a thing.
I'm not opposed to the idea but someone needs to hold the bag when mistakes are made and then you're essentially back to having title insurance in some form even if it's the general taxpayer that is doing the funding.
A large part of the cost of title insurance is because the current system of tracking such things is such a massive mess. If you massively reduce the likelihood of issues cropping up by having actually good systems in place, you don't need to hire the teams of people to actually look into the properties and find the irregularities and end up still missing things from time to time.
Just query the database. Are there any liens registered? No? It is clear then. Anyone that failed to properly file it in the database is just out of luck.
Insurance on something that constantly sees catastrophe is far more expensive than insurance on something that rarely ever sees problems.
So, no, it's not obvious. Where I live that would be some combination of the county and the the town, given the Registrar of Deeds is a county position and things like property tax and liens are handled at the town level. And the county really just handles some legal matters and doesn't collect any taxes so that sort of means the state.
To quote a previous comment it's all a bit of a mess. "All" you need to do is revamp property record keeping across the US and title insurance would be less of a big deal.
The US has a lot of historical baggage that desperately needs a thorough cleanup. There should not be two (or more) "sources of truth" for things affecting a property or alternatively, notaries, lawyers or whatever y'all use to deal with transferring real estate should be mandated to warn their clients if there is more than one place where records are kept.
There was another recent article here on cartels that suck small amounts of blood from lots of people. Too small for anyone to individually care but collectively a lot!
What’s particularly insulting is that credit scores are commoditized - they are free to go check. Technically it’s vantage score vs FICO but generally the same and definitely not worth $150.
For a while in the early 2000s and 90s they weren't free to read. It was outrageous: companies collecting data on us that can impact our lives but we need to pay THEM to see what they know about us.
This is a pretty limited view of mortgages. In varies across countries, but in the U.S. a (relatively) low APR fixed rate 30 year mortgage is an amazing way to utilize leverage (only put up ~20% collateral) on an appreciating asset.
Paying $400,000 for a mortgage vs paying $80,000 and 6% over 30 years, but investing the remaining $320,000 in the stock market (returning ~7% after inflation) and your housing payment grows much slower than inflation.
That doesn't mean every mortgage is a good idea, or there aren't circumstances where the borrower ends up losing out, but it's a tool that can be utilized if you learn to understand it.
There is an interesting dynamic here, one government agency, the FHFA, dictates that mortgage brokers have to use FICO and all three major credit bureaus, explicitly granting these companies a government enforced monopoly. Another government agency with different goals, the CFPB, comes in and complains about the price these government granted monopolies are charging and proposes regulation to limit it.
These dueling agencies may eventually find a balance, with the FHFA dictating which companies services have to be used and the CFPB dictating how much those services can charge...
The whole thing is a failure not of free markets but of different government regulators not coordinating their regulations.
If you think this is a "capitalists being evil" problem and not an "regulators over-regulating" problem, you should pay particular attention to fragments of the article:
> It’s not that hard to come up with a model for underwriting that is reasonably accurate; any bank with scale could probably do it. But FICO uses trade secrets, copyright, patents, or restrictive contracts to block anyone from doing so.
> First, the government guarantees most mortgages through Fannie Mae and Freddie Mac [...]. This complex process relies on a standard to price the loans, and that standard is FICO,
> A few years ago, the Federal Housing Finance Agency (FHFA), which runs most housing finance for the government through its control of secondary mortgage buyers Fannie Mae and Freddie Mac, decided that it might want to create some competition for FICO. So it turned to VantageScore. Only, it got backlash from Wall Street, which didn’t want to bother changing their models for mortgage backed securities.
Instead of allowing mortgage lenders to pick either FICO or VantageScore, FHFA simply required that lenders use both.
In short, the federal government essentially requires everybody to use the services of one specific private company. This company can raise prices not because it's anticompetitive, but because the government doesn't allow it to have any competition.
Perhaps, instead of trying to pass even more regulation, that government should just relax its restrictions and allow other participants on the market to compete fairly?
I don't think the solution is less regulation. When you let the banks play fast and loose with the rules, they will. See 2008.
The real answer is an open source credit model. We don't need a black box. Let private industry handle the credit line qctivity reporting part like they do now and just feed that info into an open source model. Done.
Agree with the open source credit model, and so do many governments. Open Banking is gaining traction, in Canada a new law called the Consumer Driven Banking Act was just enacted that aligns with UK Open Banking model.
While the legislation does not explicitly call out open source credit model, the legislative frameworks are being setup that align with open source model. The government mandate is: "to establish a framework within which consumers, including small businesses, can direct that their data be shared among participating entities of their choice and to ensure that the sharing of data among participating entities is safe and secure."
While the mandate does not call out the implementation method, this could be conceived as open source credit. Minimally it will chop down some of the legal roadblocks the incumbents use to maintain market power.
I am surprised Matt doesn't mention Open Banking in the article, not sure if US lawmakers have been exploring this.
The capitalists regularly lobby government to destroy their competition and make holes in regulations that would cause major disruptions to their business models. The light truck exemption to CAFE rules is a great example.
And the proper response to this is to lobby government to repeal those regulations, and close those loopholes, not to add yet more regulations aimed at breaking monopolies.
You realize, of course, that the regulations are there for a reason, and that it's probably best to reform them?
I don't want just any fly-by-night operation having the ability to judge my credit worthiness. If you don't tell people that's illegal and that they risk prison for it, they'll at least try it to make a buck. That's the problem, not government regulation. We're a country constantly at war against bad faith. And we're losing.
seems like a startup opportunity - start with a well-defined subset of consumers where you can beat FICO in accuracy, then expand out. Don't compete on price, win on detail and quality.
> FICO prohibits not only validating different models against FICO scores, but even displaying FICO scores next to non-FICO scores.
The problem is that your competition is engaged in anti-competitive practices. Any bank can make an underwriting model, and the large banks already have enough data to pull it off. They haven’t done it, and they won’t do it because the agreements they’ve made with FICO makes implementing that impossible and Government agencies require FICO.
If a startup wants to change this, they better get real good at lobbying because government policy is the biggest constraint.
It's not that simple; you are effectively required to use FICO if you're participating in the "normal" mortgage market due to government regulations.
From TFA:
>Even if a lender thinks the customer would be a good risk, the lender has to buy a FICO score regardless. Mortgage bankers don’t carry the capital to hold the mortgages they make. Instead they make a loan, and then send it onward to the capital markets. First, the government guarantees most mortgages through Fannie Mae and Freddie Mac as well as other programs for veterans and first time homebuyers. Then, the government in turn sends these guaranteed mortgages to Wall Street. This complex process relies on a standard to price the loans, and that standard is FICO, combined with the credit information from the three bureaus.
Doesn't matter how accurate or inaccurate it is, if you're selling to Fannie Mae or Freddie Mac (which is the majority of mortgages) you HAVE to use FICO.
"In 2006, the three credit bureaus decided they were tired of FICO’s position in the industry, and created a rival, called VantageScore, offering credit ratings for much cheaper than FICO"
...
"A few years ago, the Federal Housing Finance Agency (FHFA), which runs most housing finance for the government through its control of secondary mortgage buyers Fannie Mae and Freddie Mac, decided that it might want to create some competition for FICO. So it turned to VantageScore ... Instead of allowing mortgage lenders to pick either FICO or VantageScore, FHFA simply required that lenders use both. So now, instead of having to deal with one monopoly, mortgage lenders will have to deal with two"
This is not a market problem, or a technical problem. The problem here is the US federal government.
If all these loans are “guaranteed” by FM, ie US govt, why even have all these middle men taking a cut — why not do mortgages like Direct Loans from the govt?
Well the problem is that anti-"discrimination" laws will kill that startup if that "well defined subset of consumers" doesn't have enough black people.
Same reason IQ tests are banned and credit scores are only allowed to consider like 7 factors.
Lenders have to request a credit score from one of these agencies, because that's what Fannie Mae and Freddie Mac require.
This is about regulatory capture, which is of course entirely within the control of the regulators, and very indirectly by voters at the ballot box. We continue to vote for politician who allow this to continue.
We can't be taken advantage of without our (collective) permission. Let's vote for some folks that remove the regulatory capture and free up lenders (really loan originators, of which there are a great many) to compete for borrowers by (in some cases) dispensing with the credit score and other items.
> In other words, national credit reports are foundational to modern American society, binding us to one another financially as a nation through a network of computerized records. And that national market of identity is relatively new. Until 1970, credit reporting was localized, mostly through coops of town bankers who hired detectives to investigate borrowers, collecting gossip from snitches about who drank too much, who was a Communist, who slept around, and so forth.
The ridiculous thing is that the FICO score is so focused on commercial profitability rather than risk. You get lower score if you as a consumer optimise your cost of credit, price shopping/taking advantage of new rates/offers… it’s really a credit and likely profitability score
I have an 800 score while always being tight with my wallet.
The most valuable thing to lenders is someone who can 100% be counted on to always pay, even if things outside their control turn against them. People chronically fail to understand this, and end up putting themselves in financially precarious situations i.e. paycheck-to-paycheck living.
Yes, but credit scores penalise people for many actions that have more to do with being perceived to bad customers than bad credit risks.payment history is only 35% of your score and and if you add it credit utilization, your only talking about ~2/3s of the score…
You can’t get a perfect score if you change credit cards on a regular basis or cancel a zero balance card, people have worse credit because they paid off their student loans years ago or bought an older/cheaper car with cash as opposed financing one (less credit “diversity”) all of these things penalize people who have always paid their bills
I have an 800 score and never had student loans, a mortgage, or a car loan. Just credit cards. Whatever app always tells me my diversity is low, but I still have perfect credit.
This is entirely from just 3 credit cards over 10 years, but I'm pretty sure I was at 800 by year 3 or 4.
People so chronically over-extend their finances that looking around, they have no idea they are over extended. It's like overweight people looking around and thinking their weight is normal and their diet is good.
A closed line of credit (eg: closed credit card, paid off loan) will fall off your credit report after about 7 years, lowering your score.
Having many inquiries from asking for new credit cards frequently implies you're trying to take on a lot of debt, which is a higher risk factor and thus lowers your score.
Buying with cash means you didn't take on debt, so that obviously doesn't factor into your credit score.
Parent is right, people (such as yourself) chronically don't understand how finances work.
I do not have an 800 score despite never missing a payment on any account. I don’t know why my score is lower (they don’t tell you!) but my general understanding is that the original commenter is right and my score would be higher if I had more credit products.
Yeah payment history is only 35% of your score, amount of debt is 30% of your score (stupidly they want that to be below 7% of available (revolving credit) - meaning they penalise if you spend $1k/month on a credit card (and pay it off each month) and your limit is $10k, where as if your limit was ~$16k they look upon it favourably), length of history 15% (changing loan providers or credit cards hurts you here - despite flawless payment history), credit mix 10% (so if you just have credit cards this hurts you)
meh, that's not true. it's easy to have a top score while never paying lenders a dollar in profit. You just have to follow instructions online to juice your accounts by opening the right kinds and using them the right ways (e.g. keeping your usage below a threshold percentage of your limits).
The credit score is essentially price discrimination predicated on customers not being able to find and follow instructions. It also happens to give poor scores to people who are credit risks, but the difference between a meh score and a high one is mostly your ability to munchkin a bit.
I wonder if open source software can play a role in this. Maybe we can have an open source algorithm for determining credit ratings and private companies only provide a secure database of ratings.
It will also offer the lay person insights into how the credit rating is exactly determined. They can know what is causing their rating to be less than desired and take appropriate action, instead of watching a random youtube video titled "5 ways to quickly improve your credit score".
Presumably the reason they have a lower score than desired is because they already failed to do this in one form or another.
> "5 ways to quickly improve your credit score".
Have no inquiries. Have no forced account closures or writeoffs. Have as much total open credit as you can without triggering the first two. Have at least one secured or unsecured installment loan open and then paid off every 5 years. Always pay your bills on time.
It's not quick, I suppose, but the recipe is already pretty well known.
Thinking of my last loan application, they ask you if you own or rent and how long you've been at that address. Also current job and income and how long there.
At least in the UK this is done as well as pulling your credit score, traditionally it's not a factor feeding into your credit score. Banks check both your history of paying off debts and your ability to continue doing so, it doesn't matter how good your score is, if you ask for an unsecured loan that's 20x your annual income over the next 5 years it's going to get refused.
This is all somewhat complicated by recent products from credit agencies, which make use of the Open Banking standard to pull data direct from your bank accounts and use that data to feed into credit scoring as well.
Pretty much, yeah. A credit score is a descriptor of the risk of financial loss when lending the individual concerned some money.
So the only real way to grow and keep the score high is:
* Pay your credit card and loan statements when they are due (late payments imply you don't have money).
* Keep credit inquiries to the minimum necessary (an inquiry means you're asking for a loan, implying you don't have money).
* Don't max out your credit limits if possible (you're taking and maxing out lines of credit, implying you don't have money).
* Keep old credit cards open even if you don't use them, if it's practical (a longstanding open line of credit implies you have money).
* Keep doing all of the above for many years (a good credit score implies you have money and will pay back debts incurred).
There's no magic or mystery to it, it just takes a lot of time to grow and keep high because you're building and maintaining trust with banks. You know that old saying? Trust is built over years but destroyed in a second? Yeah.
More than half of the above don't imply that you don't have money. Lack of money is only one of the possible reasons for those situations.
* an inquiry means you're asking for a loan, implying you don't have money
Entities with tons of money seek loans all the time for liquidity and risk mitigation.
* you're taking and maxing out lines of credit, implying you don't have money
Nope, lack of understanding how CC scoring works (scoring designed to keep you in the credit mill) can lead to maxing out while being perfectly comfortable financially.
* Keep old credit cards open even if you don't use them, if it's practical (a longstanding open line of credit implies you have money).
What in tarnation.
This entire charade is a grotesque dance of mad clowns.
> can lead to maxing out while being perfectly comfortable financially.
Total credit usage can have an impact. So if all your lines of credit are at maximum, this is a negative signal. If one or more is, but your total utilization is 75% or less, it should have little to no impact.
This is why the installment loan part is useful. It starts at maximum balance and you immediately pay that down. It's not as strong of a positive signal until you hit payoff but it's a pretty massive one the day you do.
>Lack of money is only one of the possible reasons for those situations.
As far as a lender is concerned, if you don't pay back your debts you might as well not have money even if you actually do.
>Entities with tons of money seek loans all the time for liquidity and risk mitigation.
And each and every one of those inquiries will lower your credit score, because you're taking on more debt. Do you have money? Will you pay the debt back? The more inquiries there are (the more you ask for loans) in a given span of time, the less likely it is you have money and will pay debts back.
>Nope, lack of understanding how CC scoring works (scoring designed to keep you in the credit mill) can lead to maxing out while being perfectly comfortable financially.
Banks hate seeing lines of credit maxed out. Ask any banker worth his salt and they will all tell you the same.
If it wasn't obvious already, banks don't like lending money. That might sound strange, but for a bank (the lender) a loan is an investment and investments are risks. The more loans (debt) someone has, the more risk they are carrying and thus their credit score will reflect that.
>What in tarnation.
A line of credit in good standing that has been open for a long time means you've been making your payments properly, meaning the risk of lending money to you is lower than someone who does not have a line of credit as old. Thus, your credit score will be higher.
The age of your credit is usually determined by your oldest open line(s) of credit. Closing an old line of credit means it will eventually fall off your credit report and stop being reflected in your credit score, which will fall to reflect the new and younger age of your credit.
Again: Everything about credit score is solely about the risk you might pose to a lender. Anything that increases that risk will lower the score, and vice versa, even if it's just an implication.
Not quite. If you're not lending money someone else has deposited, you're not a bank. Banks have to lend money. Problems arise when they lend too much or lend badly.
If we want to spitball, we don't really need banks. In the age of computers, the central bank could take on their ledger function without breaking a sweat. It could then contract out the lending and deposit functions separately.
The deposit function is trivial. All deposit institutions would be 100% trustworthy. They'd just basically be ATMs for your account at the Fed.
The lending function is slightly hairier. The Fed would set risk parameters and performance-based revenue sharing. The lenders would have one client to please, and would be barred from many of the shenanigans they do today. However, they'd have a rent-seeking incentive.
Inquiries impact your credit score negatively not because you took on more credit, but because you (most likely) didn't.
The correlation is that if you get rejected by lender A, and try a new application at lender B, and again at lender C, you will have a lot more inquiries than some-one who got credit extended at the first try. FICO don't know if you actually got rejected, or if you were just checking rates, nor do they know what the reason for rejecting you was (maybe they don't even serve your area but their funnel doesn't filter on that early enough) - they just know you were checked.
This particular one is a bit iffy, my bank's UI essentially tricked me into a credit check. Then again, all of them are quite iffy and based on a few datapoints that FICO has access to, which omits many of the things you'd look at during any kind of manual underwriting.
It's not about having/not having money, it's about propensity to pay. Obviously, people need money to pay, but someone can have all the money in the world and still default on loans by not paying.
This is an edge illogical case. Like technically you can sell your apple shares for $5/share, but no broker even has the functionality to let you voluntarily take a loss.
When someone with money defaults on a loan, it's usually because a.) they don't actually have money or b.) the loan is for their company, not them.
All that to say that "having money" is functionally equivalent to "propensity to pay".
> Keep credit inquiries to the minimum necessary (an inquiry means you're asking for a loan, implying you don't have money).
This one should be outright banned, as it's effectively anticompetitive - there are thousands of banks on the planet, and it should be anyone's right to make an inquiry at each and every single bank to make sure one gets the best rates.
Yes, but the reason they say to do all the inquires around the same time is b/c many inquires spread out is a negative signal. It can mean that banks are turning a borrower down for whatever reason so they are now looking for a bank to take on the risk.
Not only do banks and credit agencies provide a "recipe" for improving your score, most do so free of charge (for existing customers).
For example, I know my score swings by +/-30 points/month. I'm fairly confident that is due to the balance on my CCs varying when the score is calculated (there is nothing else about my financial situation changing - same house for a decade, same car loan for 5 years, no new credit lines/loans, etc). But, I pay the cards off every month, and the score always rebounds.
> I'm fairly confident that is due to the balance on my CCs varying when the score is calculated
Yes. It feels wrong that the current balance of credit cards is considered debt. It should only be considered debt once (if) you start paying interest on it. So if you pay it off fully every month, it shouldn't be seen as debt.
But whatever, they consider it debt so it can make the credit score swing up and down a lot. I see this every late summer when I pay my childs school bill for the upcoming year on a credit card. It is a very large amount so suddenly my credit utilization goes up and my credit score drops around ~70 points. Then a month later I pay it off and the credit score goes back up the same ~70 points.
Yeah, I was surprised at how much it swings, but it's high enough it shouldn't matter (and easy enough to not use the cards for a month, let it rebound, then borrow whatever I need to borrow).
The report from my bank never says why. It does list factors that contribute to my score, but they're all "good" (low usage as % of available, all payments on time, etc). And never change.
I'm signed up for all the credit bureaus free accounts so I can freeze/unfreeze my credit. They send out reports monthly, along with one of my CCs. All of them have the reason. And yeah, the score is ~800 so it doesn't really matter. Still interesting to see how it moves with relatively small balance changes.
Gov licenses credit bureaus and runs its own one. Banks must report to all licensed bureaus and may choose which bureau to pull reports from. This means a report from any bureau is as good as from any other one.
Having a gov player in the market effectively creates a price ceiling, so a private bureau has to sell data for less than the government-run bureau. Private bureau has to keep innovating to justify its existence and thus keep creating new products which predict creditworthiness better and better. Credit report includes all the raw information, so banks are free to compute their own score and are not bound to anything stupidly archaic and awkward such as US FICO score, don't need to rely on any external score at all. It is the XXI century, computing a credit decision out of a few hundred datapoints takes milliseconds, costs nothing. So gov-run bureau sees a fraction of a % of the load yet effectively moderates the whole market. The largest private bureau is owned by banks (like VISA used to be) and thus is working in the best interests of the banks.
Many (if not all) problems we see in the US financial sector are the result of regulatory and legislative negligence. Just some lazy folks trying to run things the way there were in the 80es.