Industry’s Common Denominator Located

The auto finance industry has found its common denominator. To put this momentous event into more colloquial terms, the industry has found its “New Normal.”

This month and next, the top 30 auto finance companies are expected to migrate to FICO 8 Auto Score. Why is that a big deal? Well, imagine trying to herd cats, because that’s the only way I can think to describe FICO’s efforts to get an entire industry to adopt a new scoring system. And if you think I’m exaggerating, I have one word for you: “e-contracting.”

Yes, FICO does update its score every few years, but this is the first time the company is taking the lead to drive industry adoption. But keep in mind that this newest update isn’t a simple tweak of the old score. No, this update represents what we’ve been asking for since the credit crisis took hold: a score that considers a consumer’s entire credit history.

Rachel Bell, global director of scores for FICO, was at the forefront of this push. See, FICO 8 was first introduced in 2009. It currently counts 3,500 banks and other finance institutions across multiple lending lines as users. However, the auto version — which simply means the formula measures the likelihood that a customer will repay his or her car loan — took a little more time, because, as you can imagine, the auto finance industry was dealing with quite a bit back in 2009.

It’s not that the credit crisis was caused by auto loans gone bad. In fact, our industry proved that auto loans are actually a safe bet. But that’s because finance sources got really good at collections. So, let’s just say the industry was a little too distracted to consider the new score two years ago, which meant FICO had to extend the life of its prior score a couple of times.

But about 10 months after most experts say the credit crisis ended, FICO put forth a full-court press. The strategy was unleashed at the FICO World 2010, held exactly one year ago this month in Miami.

“We invited the top accounts to sit down and talk to our CEO, Mark Greene — not about the score, but the industry,” said Bell. “What came out of our conversation was a deeper understanding of the market. What they wanted was more predictable lending analytics.”

The scene was replayed six more times at industry conferences last year, including the Consumer Bankers Association’s annual get-together. What became clear, said Bell, was that lenders would need until this month to migrate. Bell listed a couple of big-name adopters, but asked that I not mention them in this editorial. Names I am allowed to mention include Volkswagen Credit, Santander Consumer USA and First Investors.

Now, this migration doesn’t mean lenders are ditching those custom scores they’ve been refining the last couple years. However, it does mean that lenders and dealers now have a common starting point.

Now, if you’re using credit platforms from ADP, AppOne, CUDL, CoreLogic, DealerTrack, Finance Express, Open Dealer Exchange, Reynolds or RouteOne, then you might have experienced the new score. The credit bureaus also are using the new formula. Equifax’s Beacon 9 score, for instance, is really the FICO 8 score.

And if you have used the new system, you probably noticed the reason codes and scoring range remain unchanged. This was done to make it easier for lenders to convert.

What has changed is what the score is telling you. See, the score is more predictive of risk because it doesn’t just look at serious delinquencies; it looks at whether consumers have other accounts with positive credit histories.

As Bell explained, the new formula considers performance in relation to all tradelines. So, if two customers have otherwise identical credit profiles, but one has two tradelines that are delinquent while the other is delinquent on all 10 — the new formula will recognize these differences and score them accordingly. Similarly, if you have a customer with only three credit accounts and he or she is delinquent on one, FICO 8 will be a little harsher on that person than it would be on someone who is delinquent on one of 10 accounts.

But let me give you the big picture: First, as I’ve written before, our business is under the microscope with the passage of the Dodd-Frank Act. Getting the entire industry on the same page when it comes to creditworthiness will go a long way with regulators. Remember, they love transparency. Second, we’re on the verge of what experts say will be a tremendous growth period for auto sales. So, a full-scale migration to FICO 8 guarantees that lenders and dealers will be operating in sync.