Home | Ask Your Question | Mortgage Glossary
Find me a lender for:  

Is Credit Scoring Fair to Minorities?

Is Credit Scoring Fair to Minorities?

December 21, 1998

"I was shocked to discover recently that my credit rating, called a 'FICO score', was poor, due largely to a 90-day past-due bill that I have every year because my work is seasonal. Comes the spring I always pay the bills in full� Most of my friends in the black community do the same� Is this FICO credit scoring system fair to us?"

It depends on what you mean by "fair". The FICO credit score is an objective measure of the likelihood that a loan made to a person today will be repaid on time. The score is based entirely on a person's credit history. It is not affected by an applicant's color, sex, race, religion, where they were born, or where they live. If "fair" is taken to mean that minority loan applicants are judged on the same objective basis as white applicants, with personal prejudice no part of the equation, then it is fair.

It took much too long for the US to get to a system that was fair in this sense, and now that we have it, we don't like all the consequences. Black loan applicants are rejected more frequently than white applicants, and the immediate reason in many cases seems to be that blacks get lower FICO scores. Hence, some observers argue that credit scoring may be unfair because it does not take account of the special circumstances of blacks. The greater incidence of seasonal employment in the black community, the issue you raise, is one illustration.

The point is well taken, but I don't think the answer is to attack credit-scoring. The credit score is only one piece of information used by loan underwriters in determining whether or not a loan should be made. Underwriters may take account of a variety of factors, including special circumstance that may have affected the credit score. Indeed, as a larger part of their job has become automated, underwriters can and do give increasing attention to special circumstances. Such flexibility has been encouraged by The Community Reinvestment Act, which presses depository institutions to meet the needs of low-and-moderate income communities. Congress has also pressured the two large Government Sponsored Enterprises that buy mortgages in the secondary market, Fannie Mae and Freddie Mac, to do the same.

Yet lender flexibility does not mean a willingness to make a loan that the lender knows will become delinquent for 60 or 90 days every year. Rather, it means a willingness to work with you (or to refer you to others who will work with you) to set up a budget plan that will allow you to avoid delinquencies. There are many resources available to help you, but ultimately, the responsibility has to be yours.

Copyright Jack Guttentag 2002

 

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

Search More Info On:

  • fico score
  • fico scores
  • fannie may
  • fannie mae mortgages
  • fannie mae
  • fico scores online
  • Shop For Your Mortgage Now!
    Shop For Your Mortgage Now!

    You'll be re-directed to Top-Lenders.com

     


    Related Articles From Mortgage Professor's web site:

    Credit Reports and Credit Scores
    November 24, 2004 What Is a Credit Report? A credit report is a report from a credit bureau containing detailed information bearing on credit-worthiness, including the individual's credit history. A typical credit report includes the following: Personal information. ... more...

    Credit Scores: How Much Debt Is Too Much?
    December 6, 2004 How Does Debt Affect FICO Score? "When I ordered my FICO score, one of the reasons given for my low score was that ?The amount owed on your accounts is too high.? Since I own marketable securities that are worth twice as much as all my debts combined, ... more...

    Is Credit Scoring Fair to Minorities?
    December 21, 1998 "I was shocked to discover recently that my credit rating, called a 'FICO score', was poor, due largely to a 90-day past-due bill that I have every year because my work is seasonal. Comes the spring I always pay the bills in full? Most of my ... more...

    Can You Get A Mortgage With a FICO Score of 450?
    December 6 , 2004 ?I have a home worth $142,000 on which I owe $81,000, so I have $61,000 of equity. I want to turn the equity into cash, but my credit is poor, in the mid-400s, and I can?t find a lender who will deal with me. Do you know any lenders who will help me?? ... more...


    More on fico score...