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One Wrong Move and Your Credit Score Gets It

By       Message Stephen Pizzo       (Page 1 of 2 pages)     Permalink    (# of views)   4 comments

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Ever see one of those shock-belts they use to make sure prisoners behave while in court? Just one wrong move and a deputy with a remote can bring the biggest, meanest hunk of crook whimpering to his knees.

Well, you can't see it, and you can't feel it -- exactly -- but if you're American and over 18 you've got one of these things strapped around you too. You are, kinda aware of it, just not aware of being aware of it. You'll know immediately what I mean when I type the next two words: Credit Score.

Over the past 25-years or so nearly every adult American has been equipped with one of these things. And it works pretty much the same way as a shock-belt -- one wrong personal finance move and some financial service bureaucrat off in Delaware or New York can and will bring you right to your fiscal knees.

But let me back up a bit here, because I got out ahead of myself.

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The credit score did not begin as a tool for controlling your behavior. It was, in fact, the natural byproduct of technology. I remember this well, because I was covering banking and mortgage lending during the mid-1980s. Lenders were buried under tons of old-fashioned paper forms. The industry had lagged behind other industries in harnessing the power of computers and was desperately trying to catch up. Computerized loan processing, underwriting and servicing was critical if the lending industry was to survive.

But when you computerize things once done by humans you have to reduce every step of the process to numbers. In the "old days," before automated loan processing, evaluating a borrower's risk was a hands on human process. Paper forms were filled, questions asked, employers contacted and paper records searched and more paper documentation required.

Much of that could be handled by computers, except for one -- evaluating the credit worthiness of the borrower, a heretofore highly subjective conclusion. Which is why bankers once lived by the credo "know your borrower," -- meant literally.

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That level of hands-on, heads-out-of-ass analysis was impossible for computers. Then one firm, Faire Issacs, and later others, began to gathered all that kind of information individual consumers and created formulas for deciding how each kind of behavior, or misbehavior affected their credit worthiness, or lack thereof. They then reduced all that information to a tidy little three-digit number -- the FICO -- and the credit score was born.

Lenders were giddy. The log-jam was broken and a stream of disruptive technologies followed that transformed the stodgy old Model T lending business into the Starship Enterprise.

Humans were removed from nearly every step of the lending process. It was hailed as, not only a paradigm leap in efficiency for lenders, but good for consumers as well... at least for the well-behaved consumers, who would enjoy easier credit and better terms in return for their better behavior.

Then the laws of capitalism and human converged, as they always do, and took over. One would think that conservatives, who are always wary of any intrusion on American's personal freedom, would have balked at the idea of some faceless, automated system assigning every adult in America a number that controlled their financial fate -- kind of like financial version of a medical care death panel; those with high scores get better treatment than those with lower scores.

But alas, no... conservatives were all for it. Credit scoring, like off-shoring manufacturing jobs, was the way of the future, another efficiency tool to cut costs and boosted profits. How could that be bad?

Well, sure enough, it worked, but not entirely as advertised. It succeeded in automating loan originations, underwriting, processing and servicing. Computerized loans were faster, cheaper and a helluva lot more profitable. Thousands of human loan agents, underwriters and processors were replaced by one air-conditioned room full of Cisco servers humming away 24/7/365 -- no sick days, no vacation time. Kha-ching.

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Automation heralded in a golden age of lending, in particular consumer credit and home lending. More home loans were made because it became so cheap and easy to do so. Online originations surged as the Internet matured during the 1990s. With ever-expanding bandwidth together with faster servers and improved software, lenders now had excess processing capacity.

And that's when the real trouble began.

Why limit lending to just home purchases? Since consumers can arrange loans online now, why not let them also arrange home equity lines of credit? After all, with property values surging, thanks in part to computerization, and with consumers now virtually branded with a reliable and up-to-date credit score, what could possibly go wrong?

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Stephen Pizzo has been published everywhere from The New York Times to Mother Jones magazine. His book, Inside Job: The Looting of America's Savings and Loans, was nominated for a (more...)

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