The Black Informant

(baltimoresun.com) In a report to Congress that is certain to generate controversy, the Federal Reserve Board says that credit scores vary “substantially” among racial and ethnic groups, but have made credit more available for major consumer purchases such as buying a home.

The Fed’s study, encompassing credit bureau records and demographic data from a national statistical sample of 301,536 individuals, was mandated by Congress in 2003.

Credit scores are heavily used not only in home-mortgage underwriting and pricing, but in credit cards, auto loans, employment and rental application screening, and by the insurance industry.

Critics have questioned the accuracy and fairness of credit-score models, charging that in some cases they are inherently biased against minority groups such as African-Americans and Hispanics.

After a wide research effort over several years that focused on three credit-scoring models — including one created by Federal Reserve staff economists — the agency concluded that:

• Credit-score statistical factors and models are not biased against any particular demographic group and are highly predictive of future payment performance. Lower scores correlate strongly with future delinquencies; higher scores are associated with good payment performance.

• African-Americans and Hispanics, on average, “have lower credit scores than non-Hispanic whites and Asians.”

• Younger individuals of all demographic groups tend to have lower credit scores on average than older individuals, in part because credit-scoring models focus on past payment histories and length of credit accounts. Younger consumers generally have fewer accounts and shorter payment histories.

• The payment performances of some demographic groups are somewhat worse — or better — than their numerical scores might suggest.

For example, according to the Fed, “blacks, single individuals, individuals residing in lower-income or predominantly minority census tracts show consistently higher incidences of bad performance than would be predicted” by their credit scores.

On the other hand, “Asians, married individuals, foreign-born (particularly, recent immigrants), and those residing in higher-income census tracts consistently perform better than predicted” by their credit scores.

• Recent immigrants’ scores might be improved by expanding the range of credit-like accounts reported to the national credit bureaus to include rent payments and other recurring accounts. Once in the bureaus’ files, these accounts could then be used to help compute immigrant credit scores, enhancing their ability to predict future payment behavior.

• The types of credit used by various demographic groups “do not appear to be the source of differences in [payment] performance once [the] credit score is taken into account.”

That finding runs counter to criticism by some consumer advocates that mortgage lenders and brokers tend to steer African-American and Hispanic borrowers into higher-risk, higher-cost loans — subprime adjustable-rate home loans with hefty payment jumps, for example — that increase the likelihood of default and foreclosure. (more…)

While I do believe that the whole credit scoring system can be very confusing, I never believed that the whole bias rap never had any credence. Credit reports can and have always been challenged oftentimes resulting in a higher score. But here is the key: Folks have to be willing to go through the process and have have some sane level of patience if they want to see improvement in their credit score. The system isn’t the greatest, but it does work.

Meanwhile, part of me wants to address Obama’s latest pandering to voters who could loose their homes thanks to their sub-prime loan. But I see that the folks over at LA Times (yep, THAT LA Times) are doing a good job without me.

Yes.Bush is off his rocker too!

I wonder if the few families not too far from me whose over-million dollar, over 6,000 sq. ft homes are now being sold as bank repos would be considered as victims of the mortgage industry? And if so, should folks living well within their means be responsible for bailing them out with their taxes?

I’ll answer that one–NO!

Related:

Check out my podcast: BlackInformant.com Podcast:”Understanding the Mortgage Industry and Subprime Loans” Interview with Mortgage Industry Expert Christopher Cruise —Click under “Podcast” on the top of this page.