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FICO Score Changes: A Boost For Risky Borrowers?

FICO Changes Boost Scores for Risky BorrowersFair Isaac is changing his game. And that has some financial experts worried.

The nation’s premier credit scoring agency, the Fair Isaac Company, has come to an agreement with the Consumer Financial Protection Bureau to change the way credit scores are calculated. It’s a move that could boost lower end scores by 25 points or more by ignoring certain kinds of bad debt.

And that, financial experts fear, could create a landslide of bad debt, as risky borrowers are suddenly able to qualify for loans they can’t actually pay off. That scenario raises the specter of another economic collapse like the one that hit the housing industry back in 2008.

Why the Changes?

The housing crisis of ’08 put the spotlight on a bevy of bad practices on the part of both lenders and borrowers. As the housing bubble began to expand, banks made home loans available to just about anybody who asked. Adjustable Rate Mortgages made initial payments low and easy – and many borrowers didn’t understand that that could change dramatically in a few months or years.

Then the crash happened. Homeowners fell behind when those balloon payments came due. Houses everywhere fell into foreclosure. And the nation’s big banks were caught in a variety of fraudulent practices, including faking foreclosure paperwork and lying to customers.

All that led to the implementation of some wide-ranging legislation to try to keep it from every happening again. The Dodo Frank Act took effect in 2010 – an attempt to protect consumers by imposing tighter lending standards and penalizing banks that chose to keep writing loans that fell outside the provisions of the new Qualified Mortgage Rule.

But those standards locked many borrowers with lower credit scores and trouble meeting down payment requirements out of the process. The result? Far fewer loans for major purchases such as home buying – and that raised worries about the future of the economic recovery.

Enter the Consumer Financial Protection Bureau. Created under the provisions of the Dodd Frank Act, the CFPB’s job was to do exactly as its name says – to protect people from bad and misleading financial practices and to help borrowers in trouble.

Now, in a move that ironically reverses tenets of the Dodd Frank Act that created it, the CFPB is asking FICO to loosen its standards to allow more people with blights on their credit report to qualify for mortgages and other kinds of loans. It’s a move that, the government hopes, will jump-start the sluggish housing market and the economy as a whole.

FICO’s New Moves

FICO scores set the standard for most borrowing the US. According to a recent Huffington Post article on the CFPB’s actions, over 90 percnet of all loans in the country are based on FICO scores. Those scores help lenders set interest rates and determine their own level of risk. They’re also used by employers as part of the hiring process.

Fair Isaac is not a government entity – but in this case it’s changing major parts of its credit scoring process to address the CFPB’s concerns. Those involve:

Bad debt discharged through collections. If a borrower clears an unpaid debt through an arrangement with a collection agency, that debt won’t be a factor in calculating the FICO score.

Medical debt. It’s well known that medical debt, especially hospital related debt, is one of the leading causes of bankruptcy in the US. Under the proposed FICO changes, medical debt would have less impact on credit scores. And if it’s the only debt a person has, their score might jump 25 points or more.

People with skimpy credit history. It’s always been true that the less debt you have, the more of a credit risk you are. Now, FICO is implementing new ways to calculate creditworthiness for people with little credit history, so that they can end up with a higher score.

Who’s Affected?

The changes to FICO’s scoring system are intended to directly affect those who have been denied credit in recent years because their scores fall below the cutoff point for what lenders have determined to be safe lending.

That should open doors for these marginal borrowers to qualify for loans to buy homes and other big purchases, which in turn would jumpstart the economy. Advocates of the changes, which include consumer advocates as well as financial professionals, praise the move as a way to encourage more participation in the economy and help people build stability and security.

But critics of the move argue that the change in scoring is nothing but a numbers game. The higher scores borrowers would have under the new system don’t actually reflect an improvement in their ability to repay a loan – and ignoring bad debt cleared through collections won’t make the borrower’s behavior improve next time around.

That, they say, could create a backlash that forces lenders to tighten standards even more, or raise interest rates. Another housing crisis could hit as risky borrowers default again, with conseque3nces for the economy as a whole.

The changes to FICO”s scoring system won’t take effect until this fall, so it’s too early to tell which scenario will play out. But the CFPB’s plan to change the borrowing landscape has the potential to affect borrowers everywhere – even if their own credit is sterling.   (Featured image: Flickr/JanetRath)

Source:

Frankle, Neal. “How Upcomng FICO Credit Score Changes Might Rock the Economy.” The Huffington Post. Huffpost Business. huffingtonpost.com. 26 Aug 2014

Read more from The American Monetary Association:

Money Talks — But What Does It Say?

America’s Forum with J. D. Hayworth

The American Monetary Association Team

The American Monetary Associaiton

 

 

Money Talks — But What Does It Say?

Money Talks But What Does It Say?What does your money say? Of course, most of the time, we’re more concerned with what money can buy – and what various institutions like the Federal Reserve and the megabanks are doing with it. But a country’s history, culture and values are written on the coins and bills it keeps in circulation. Case in point: the lowly US dollar bill, which contains in its often-misunderstood symbols and slogans the dreams and aspirations of its founders.

The images and words that appear on paper and metal money aren’t static. They change over time to accommodate new circumstances – and political conditions. US currency alone has undergone several permutations as a result of the country’s changing configurations and events like the Civil War. And in other parts of the world, new money commemorates changing regimes and leaders.

Money Talks In Symbols and Slogans

Because money acts as a kind of shorthand for what the issuing country stands for, every image and word printed or stamped on stands as a symbol with layers of deeper meanings behind it. And as those meanings become hazy with time, the symbols themselves can take on entirely new meanings their creators never intended.

Most officially circulated currency carries at least the image of a prominent individual, a motto or slogan, and a symbol representing what the country stands for. Beyond that, money can carry a variety of images and slogans.

Take the dollar, for example. The greenback and its cousins the bigger denominations are recognized around the world. Everybody knows who’s on the bill – Ben Franklin – but what done the other parts of the dollar represent?

Seals, Symbols and Portraits

Franklin wasn’t always on the bill, though. Back in the 1860s, the face on the dollar bill was actually that of Salmon P. Chase, the Secretary of the Treasury. And at that time there were actually several currencies in circulation as the Confederacy printed its own money and Texas declared itself a Republic with its own money too.

Those things aside, though, the key elements of American money haven’t changed too much since their creation not long after the country was born. And those mysterious symbols that raise the specter of black magic and Satanism were the brainchild of a designer inspired by the poetry of Virgil and the history of Egypt.

The face of the dollar, like other denominations, has a Treasury Seal. It consists of a scale, representing balance, a chevron with 13 stars for the 13 original colonies and a key symbolizing official authority. Until 10996 each banknote carried a Federal Reserve Bank designator that indicated where it was produced. Now, only the dollar and $2 bills carry this unique designator, a letter that proclaims the bill’s origin. Larger denominations simply carry the general Federal Reserve System Seal.

The Great Seal: Eagle and Pyramid

The dollar bill and others also carry the Great Seal of the United States – complex creation consisting o an eagle and an unfinished pyramid.

The eagle’s meaning is pretty clear – but even at that, its symbolism has stirred some controversy. The Eagle of course represents freedom and independence, soaring high and strong. There’s a shield on its chest, covered with the red, white and blue stripes and stars we’re familiar with: thirteen stars for the original colonies and blue for justice, white for purity and red for valor.

This eagle bears thirteen arrows in its left talon, representing war, and an olive branch in the right representing peace. But it’s the other part of the seal, with its mysterious eye atop a pyramid, that fuels speculation of darker meanings.

What does an unfinished pyramid with an all seeing eye on top say about the country? This symbol on the Seal, along with its inscription, “Novis Ordo Seclorum,” – “New World Order” — has fueled speculation about Masonic influences, alchemy and even Satanic references. But according to Charles Thompson, who designed the Seal in 1782, the truth is more mundane.

The pyramid, deliberately left undone, was meant to symbolize strength and duration. While that may call for a stretch of the imagination, the all seeing eye, said to represent watchful Providence, is clearer. And the inscription, inspired by Virgil, was meant to indicate that the birth of the country introduced a new direction into the world – not world domination.

The dollar and its relatives in the higher denominations have been redesigned and refurbished from time to time. Colors have changed slightly and the relative prominence of various elements has shifted. The symbols and messages on the greenback may have been misunderstood and even maligned, and its fortunes go up and down in the world’s money markets. But still it bears on its printed face keys to the early days of the country – and the vision its founders had for the future.  (Featured Image:Flickr/imagesofmoney)

Read more from The American Monetary Association:

AMA 90: Work the System with Sam Carpenter

AMA91: America’s Forum with J. D. Hayworth

Carla and The American Monetary Association Team

Final_AMA_Logo-150x1502

 

AMA 91 – America’s Forum with J.D. Hayworth

J.D. Hayworth is a former Arizona Republican Congressman and host of “America’s Forum” on Newxmax TV.

 

Hayworth discusses why Bill Clinton’s Presidency so corrupt and what this corruption means for Hillary’s bid in 2016.

 

Hayworth contested John McCain and did not win in 2010. He explains the biggest issues he had with McCain. 

 

Hayworth finally shares how he went from sports broadcaster to politician.

 

J.D. Hayworth was a Representative from Arizona. Born in Highpoint, Guilford County, N.C., July 12, 1958, he graduated from High Point Central High School, Highpoint, N.C. and earned a B.A. from North Carolina State University in Raleigh. He’s a former television and radio journalist, before being elected as a Republican to the One Hundred Fourth and five succeeding Congresses (January 3, 1995-January 3, 2007). He was an unsuccessful candidate for reelection to the One Hundred Tenth Congress in 2006. 

 

 

Check out this episode!

AMA 90 – Work the System with Sam Carpenter

Sam Carpenter author of, “Work the System: The Simple Mechanics of Making More and Working Less.” He joins the show to discuss how can people make more money by working less.

 

With a background in engineering, publishing, journalism and telecommunications, Sam is author of the book, “Work the System: The Simple Mechanics of Making More and Working Less,” (2009, Greenleaf Book Group, www.workthesystem.com). He is also CEO and majority owner of Centratel (www.centratel.com), a national telephone answering service that he has operated for 28 years. Sam is founder and director of Kashmir Family Aid, a 501C3 non-profit aiding surviving school children of the Northern Pakistan and Azad Kashmir earthquake of October 2005 (www.kashmirfamily.org).  

 

Outside interests include mountaineering, skiing, cycling, reading, traveling. “Work the System” won the prestigious “Best Non-fiction” award at the New York Book Festival. The book is now in its third edition. Sam also owns a consulting firm and distributes an on-line product, The Work the System Academy (www.workthesystemacademy.com) Originally from upstate New York he lives in Bend, Oregon and Seattle, Washington with his wife Linda.

 

Get “Work the System” at www.workthesystem.com

 

Visit the Work The System Academy at www.workthesystemacademy.com.

 

Check out this episode!

AMA 89 – The Truth about Gold and Silver with David Morgan

David Morgan is Publisher of The Morgan Report. He joins the show to discuss what’s next for gold and silver after the FOMC’s latest announcement and the news in Iraq. 

 

In the interview, Morgan shares whether investors should trust this metals rally. He explains why silver is a better currency and more ubiquitous than gold. 

 

Morgan then discusses how levered banks are and if financial institutions have learned anything from the 2008 crisis.

 

Seduced by silver at the tender age of 11, David Morgan started investing in the stock market while still a teenager. A precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the Silver-Investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems ahead and reasons for investing in precious metals.  

 

David considers himself a big-picture macroeconomist whose main job as education—educating people about honest money and the benefits of a sound financial system—and his second job as teaching people to be patient and have conviction in their investment holdings. A dynamic, much-in-demand speaker all over the globe, David’s educational mission also makes him a prolific author having penned “Get the Skinny on Silver Investing” available as an e-book or through Amazon.com. As publisher of The Morgan Report, he has appeared on CNBC, Fox Business, and BNN in Canada. He has been interviewed by The Wall Street Journal, Futures Magazine, The Gold Report and numerous other publications. Additionally, he provides the public a tremendous amount of information by radio and writes often in the public domain.

 

Find out more about David Morgan and his work at www.silver-investor.com.

Check out this episode!