On April 6th, 2020 the Consumer Financial Protection Bureau updated their blog article titled “Guide to Coronavirus Mortgage Relief Options.”1 This article recommends that “if you can pay your mortgage, pay your mortgage” and if you can’t pay your mortgage you may qualify for a “protection” under the Corona Virus Aid, Relief, and Economic Security (“CARES”) Act. The article specifies that the provisions are limited in scope and it does not imply that participants will be protected from a negative mark on their credit history or FICO Score if they are late for a mortgage payment.
A FICO Score is a measure of credit risk calculated by the publicly-traded data analytics company, Fair Isaac Corporation (the “Company”), and assigned to individuals. The FICO Score was just one of many products sold to organizations worldwide that aggregated personalized data on consumers and generated $1.2B2 in revenue for the Company’s 2019 fiscal year.
The FICO score is used by financial institutions providing mortgage loans and property management companies leasing residences. If a person is negatively impacted by the calculation used in the FICO score their options for housing are limited as they cannot buy a house or lease a residence. It is important to understand that as a for-profit institution, the Fair Isaac Corporation is under no obligation to calculate unbiased or fair scores for individuals and is incentivized to maximize the profit of stockholders. This means that the Company may include undesirable variables into the formula for the FICO score in order to influence consumer behavior for its profit.
For example, it is not usually financially prudent for an individual to open credit cards which charge annual fees, other hidden fees, and create a contractual liability of 20%+ APR when he or she can pay cash. By nature, paying for expenses in cash indicates that someone is appropriately managing their income-to-expense ratio. Managing a higher proportion of income with cash could also lead to financial habits of saving cash which further decreases credit risk. Instead of being encouraged to manage cash, consumers believe they should open credit cards at steep interest rates to improve their credit score. The main beneficiaries for opening credit cards are credit card suppliers who are also frequently customers of the Fair Isaac Corporation.
Overall, it is important to understand that the FICO credit risk scoring system may not be reasonably adjusted to account for missed or late payments driven by a forced government quarantine. This is especially important for small business owners who, although their business was forcibly closed for a period of time, may be negatively impacted in the future by a lower FICO score driven by a late loan payment. In these uncertain times, try to make timely mortgage payments even with CARES Act Relief Options as we are unsure of the long-term effects of missing a payment.
Sources
1Consumer Financial Protection Bureau. (6 Apr. 2020). “Guide to Coronavirus Mortgage Relief Options.” Retrieved from https://www.consumerfinance.gov/about-us/blog/guide-coronavirus-mortgage-relief-options/ .
2Fair Isaac Corporation. (2019). Form 10-K 2019. Retrieved from SEC Edgar website http://www.sec.gov/edgar.shtml