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.
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.