Credit Where Credit’s Due

Kudos to E-Loan for yanking Fair, Isaac
out of the ivory tower and taking ’em behind the woodshed.
I almost broke down and added a round lot of the Web mortgage lender to my
portfolio just for sentiment’s sake, but I’m no fan of e-financials when
sheriff Greenspan is circling the block.


If you’re not familiar with the ongoing tug-o-war between Fair, Isaac and
E-Loan, here it is. First, the players.
E-Loan was founded a few years ago by Janina Pawlowski and Chris Larsen, a
couple of crackerjacks who grabbed the almighty first mover advantage in
the online market for home mortgages.


Before coming public a year ago this month, the dynamic duo came within a
stone’s throw of selling the company to Intuit
for $130 million in cash and stock. But with nerves of steel and eleventh
hour funding from Yahoo! , the start-up hit the
new issues market with a moonshot debut.


Since then, the Fed’s aggressive rate hikes have sent E-Loan’s stock on a
game of Chutes and Ladders. In the midst of a sagging share price and a
hemorrhaging bottom line, the two founders were made scapegoats and
subsequently reshuffled to new positions within the company late last year.


But arguably, the start-up’s finest hour came in February of this year,
when E-Loan began fighting the good fight for consumers. In a harmless
press release, the company quietly announced plans to begin making FICO
credit scores readily available to the average Joe. The move had Fair,
Isaac fuming, and the credit scoring firm subsequently refused to
accommodate E-Loan, cutting the freely available scores off from both the
mortgage lender and consumers.


So why all the fuss?


Fair, Isaac Credit Bureau Scores, commonly referred to as FICO scores, are
used in nearly three quarters of all lending cases. Buying that Fry’s big
screen TV on credit? Looking to lease that beach getaway or apply for a
Mastercard? That’s FICO. And Fair, Isaac has held its creditworthiness
scores close to the vest for years.


Shrouded in Gestapo-like secrecy, Fair, Isaac has never before disclosed
the method behind the madness of its FICO scores. Essentially, the company
claims consumers are dumb as dirt and can’t be trusted with such complex
numbers in their grubby little hands.


Here’s an example of how the compilation is officially explained:


FICO scores are calculated by a system of scorecards. In developing
these scorecards, Fair, Isaac uses actual credit data on millions of
consumers, and applies complex mathematical methods to perform extensive
research into credit patterns that forecast credit performance.


Pure garbage.


Peek under the covers and you’ll find that Fair’s foot dragging amounts to
a selfish attempt at guarding its methodology from competitors who could
easily duplicate the scoring process on their fingers and toes. And, of
course, you and I get the short end of the stick.


Until now.


Thanks in part to E-Loan’s swashbuckling antics and subsequent brouhaha,
lawmakers have taken notice of Fair, Isaac’s longstanding abuse. Egged on
by the politics of angry constituents, California’s legislature drafted a
bill that would call for better credit score disclosure to consumers. And
after all these years of backwards logic, Fair, Isaac is in sheer panic.
Sensing the crown jewels were in danger, the company hastily released its
scoring criteria last week and announced the first baby steps toward better
disclosure.


Fair, Isaac is still playing hide and seek with its credit scores, but the
company knows “dumb-as-dirt” consumers are knocking at the door with
lawmakers close behind. And Fair, Isaac will finally get its comeuppance
because of a little Net start-up who dared rock the boat.


Any questions or comments, love letters or ha

te mail? As always, feel free
to forward them to [email protected].

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