One Cheer for Fair Isaac

Sometimes we don’t know exactly how broken things are until after they get fixed.

Case in point: Fair Isaac Corp., the company that created the model used to calculate the scores underlying millions of consumer loan and credit decisions.

The New York Times described Fair Isaac’s formula as “one of the most widely used and influential credit scores.” The information it generates is used in the credit reports generated by Equifax, Experian and TransUnion, the three big companies that gather information on individuals and track their credit ratings. It is hard to understate the influence of FICO, as the company and its namesake scoring system are called.

Like all models, FICO has its flaws. Last week, the bad news was we learned how much more deeply flawed this model was than we previously understood. The good news is that Fair Isaac has been cajoled by the Consumer Financial Protection Bureau, an agency created by the Dodd-Frank Act, into applying more balance and fairness in its metrics.

There were two significant changes:   Continues here



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