Fair Isaac: Less Than Fair

In 2008, Fair Isaac Corp. (FIC – $24.25), creator of the FICO or credit-scoring process, will roll out two new product lines designed to disadvantage American consumers.

One, a new scoring system, is merely questionable. The other, tying credit scores to hospital admissions, is reprehensible.

First, Fair Isaac will revamp the metric under which it scores credit. No longer will consumers (like college students) be able to piggy-back their way to better credit as authorized users on parental credit cards. The update, dubbed FICO 08 – and touted as a suite of tools designed to predict future default risk – is alleged to increase predictive strength by 5 to 15 percent, according to Fair Isaac’s vice president of scoring, Tom Quinn. These tools will penalize consumers with a high debt load more than the earlier version.

The piggyback practice, deplored by Fair Isaac executives, is nonetheless completely within the law, as outlined by the Equal Credit Opportunity Act (ECOA) of 1974 (amended in 2003), instituted to protect consumers from predatory lending practices. The new FICO 08 will completely disregard authorized user accounts and is expected to adversely affect 41 million Americans.

Three major credit reporting agencies – Equifax, Experian, and TransUnion (all of which use a FICO model) – take authorized user accounts into the metric when generating a person’s credit score. Only one has tentatively agreed to adopt the new parameters. The other two are waiting to see if 08 generates the analyst-predicted string of class-action lawsuits sure to arise as already beleaguered American consumers protest.

The new FICO scoring method is a result of the subprime mortgage debacle. Lacking a scapegoat, and unwilling to admit the truth to shareholders (i.e., that they made loans based on nearly 60-percent debt-to-income ratios, at 100 percent of a property’s value), mortgage companies have begun pointing the finger at Fair Isaac, arguing credit scores were not predictive enough.

FICO 08 is Fair Isaac’s response to these accusations. Instead of addressing the problem (poor lending practices inspired by greed), the credit-scoring company will simply make credit harder to get. In fact, Fair Isaac is not all that good at predicting its own status. Last week, Fair Isaac stock plunged to its lowest price in more than five years and the company revised its earning guidance.

Credit crises generally tend to benefit Fair Isaac. This is not true of the mortgage meltdown, which has resulted in fewer credit card companies soliciting for business (and a cutback in the need for credit scoring). The credit crunch is further exacerbated by the fact that Fair Isaac now has serious competition in the form of the above-mentioned credit companies. In a reflection of more company woes to follow – or perhaps more mischief – two Fair Isaac employees – George Battle, director of business analytics, and William Lansing, a business analytics provider – bought a total of 22,000 shares of Fair Isaac stock in January.

The Mortgage Debt Relief Act of 2007 – which forgives the tax burden of inflated mortgages if the consumer defaults and a home is sold for less than the purchase price – offers little actual relief. Many former homeowners are simply walking away from inflated mortgages and incurring serious dents to their credit scores. According to Jay Brinkman, an economist with the Mortgage Bankers Association (MBA), the act is of greater benefit to mortgage brokers, and mortgage holders, than homeowners.

The newest and most disturbing item on Fair Isaac’s agenda, however, is credit scoring for use by hospitals. Dubbed MedFICo, this rating could begin appearing on hospital admission’s screens by midsummer. Developed by Healthcare Analytics of Massachusetts, and funded by $10-million grants from Fair Isaac, Tenet Healthcare Corporation (the dirtiest company in the health care business), and Dallas and North Bridge Venture Partners, this newest Fair Isaac substitute for sound fiscal policy, may result in patients with low credit scores being shuffled aside or even refused admission by hospitals.

Scoring for MedFICo will reportedly be based on a patient’s previous payment of medical bills. For those at the bottom of the economic ladder, who often pay medical bills last, this spells a real health-care crisis. Steven Farber, chief executive of Healthcare Analytics, insists admission’s denials will not happen, and says hospitals will use the system only after the patient is discharged. Steve Mooney, a Tenet executive, says the scoring will help hospitals determine whether to pursue payment or write the account off as a bad debt. These assurances, from industry insiders, are about as convincing as the 2002 promises of mortgage bankers who said creative lending was not inherently dangerous.

Given the large percentage of uninsured or under-insured in the U.S., coupled with the notorious inaccuracy of credit-scoring companies (which have a 29 percent inaccuracy rate due to slow or inaccurate reporting), the healthcare outlook is grim. Add to that the tendency of insurance companies to pay late or not at all, and healthcare in this country – if based on credit scores – is likely to become unavailable to many Americans, beginning with immigrants and the poor and “trickling up” to middle-income earners caught in the most recent Federal financial fiasco we now call recession. This is not a sustainable policy, and puts American healthcare below the par set by Third World Countries like India, Mexico and China.

Disclosure: I don’t own Fair Isaac stock.

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Photo:b.franchina, Creative Commons, Flickr