Phil Bracken: Navigating New Credit Score Regs

Phil Bracken, Managing Director of VantageScore, sat down with Mortgage Media’s Tom Wilkins at the MBA Annual Convention in Austin.  Bracken, who is also chairman and founder of America’s Home Loan Alliance and has held several executive positions at Radian, Wells Fargo, Prudential and other companies in the industry, has more than 40 years of experience in leading large financial institutions and managing complex government and industry relations programs. He discussed new laws governing credit scores, updates to the company’s predictive scoring model, VantageScore’s growth and more.

Tom Wilkins: Great to see you Phil and thanks for joining me this morning. So, first of all, it’s a question I ask everybody, why are you here? Why is the MBA annual something that you feel you need to be at?

Phil Bracken: Great question. People, I’m sure, answer it different ways. My simple answer is, this is the assimilation of the thought leaders in the marketplace, mortgage marketplace, and also decision maker leaders in the marketplace. And that’s not just single-family residential real estate, it’s also public policy. And in many cases we come here to find out what the most preemptive needs are for the marketplace and new innovations, new opportunities, new products, new services, etc. Many of those get announced here.

And it’s also a place where people can build relationships and build opportunities for launching into the next year. So, it’s a great forum for us, great forum for the MBA, and a wonderful opportunity for those participants.

Wilkins: Well, and you can learn things here, whether it’s in exchanges, in networking, and going to the sessions that you can take back to the VantageScore team, I’m sure.

Bracken: Oh, absolutely. No question about that. And as you know, VantageScore is growing, mounting a wonderful campaign and crusade into the mortgage marketplace as well. We’re inculcated in credit card and auto and student loan and other credit sectors of the marketplace. And about to be a full household name in mortgage as well. So, it’s really important for us to be here, and all the major players are here. That’s why we want to be here.

Wilkins: This is a question that I think a lot of us are asking. Where is the industry when it comes to utilizing the technology, that VantageScore offers to improve credit scoring? I know that a lot of the articles that I’m seeing that are coming out of National Mortgage News, HousingWire, what have you, are talking about your competitors and what you have as an advantage for the marketplace.

Bracken: For 25 or 30 years, there has been a proprietary use of and a required use of a standard conventional credit score in the marketplace, not VantageScore. But recently last year, Congress passed a new bill, Senate bill 2155 that included the credit score competition provision in it. That opened the door for competition for credit scoring models across the industry, primarily through Fannie Mae, Freddie Mac, but also includes part of FHA as well.

That law that was signed into law last May required the FHFA to write rules and standards for how that process would unfold in the marketplace. They’ve completed that. They issued the final rule a month or so ago, and it’s the rule that says we are going to have competition in the credit scoring model marketplace. And you can anticipate that mortgage lenders are going to be able to use different scores going forward.

The reason that’s important for VantageScore, is that we believe that our credit scoring model 4.0 is an incredibly predictive and precise credit scoring model, if not the most, the best credit scoring model in the marketplace. Clearly, it’s used across all industries other than mortgage, and as you know, lenders wouldn’t adopt a credit scoring model that’s not more predictive, more precise, more accurate, and is a great risk management tool. In addition to that, we are confident that we could provide a credit score to about 40 million people that don’t have a score today. And from that composition of people, about 10 million of them would have a score that would make them meet the minimum threshold for a mortgage.

Not that all of them would be mortgage eligible right now, but certainly it’s a wonderful, wonderful new opportunity for expanding the credit markets for consumers that are eligible. And when we say eligible, we don’t encourage anything that’s not safe, sound, fully underwritten, well-documented, and sustainable. And we know we can reach a population that would be expansive and inclusive for the lenders that are here today. That’s why this is exciting for us.

Wilkins: What percentage of the public, I guess, is using VantageScore? How are you measuring your success? And is adoption coming fairly quickly after the Senate bill that was introduced last year?

Bracken: Let me give you two contexts for that. The first of which is about about six years ago, five or six years ago, VantageScore actually started to get traction in the credit markets. So, from six or seven years ago of having not much adoption in the marketplace, last year, 2018, we announced a market adoption of about 10.5 billion. That’s with a B. Credit scores that were used in the lending marketplace, so that would be for a credit card, auto, student loans and other types of credit. And about 2,500 lenders had adopted VantageScore and used it 10.5 billion times from about zero in six or seven years ago. They wouldn’t be doing that if the model wasn’t more predictive, more precise, and had tools in it that provided great risk management capability.

In fact, tomorrow we’re going to be announcing our market adoption from 2018 to 2019. I can tell you that it’s going to be substantially higher than the 10.5 billion number. And a combined annual growth rate that’s wonderful and getting better. So, we are growing like crazy in the marketplace.

The translation of that into the other half of the mortgage market, there are some logistical things that have to be done. FHFA, Fannie Mae, and Freddie Mac in issuing the guidelines for how we make application for approval for our credit score. But that’s just logistical process. And in the next few months we’ll be undertaking that process, and simultaneous with that meeting with lenders to have them evaluate VantageScore to unfold in the marketplace as well as in the mortgage marketplace.

I might just add a little bit to this, Tom. We recognized last year that there were many lenders across America that would love to use VantageScore in the mortgage marketplace. So we initiated a number of mortgage pilots with certain lenders, a very small group. Because we don’t have the bandwidth to manage a thousand of them right now, but we’re doing some testing with those. We don’t have them live yet, but we’re pretty close on a number of them. And we would expect that that would be one of the things that we would be engineering over the next three to six months to actually inculcate VantageScore into the marketplace in a very methodical manner.

Wilkins: So it must have felt like a windfall,for want of a better term, when the Senate bill was passed because you’d been doing, VantageScore had been doing so much work building the technology, and all of this stuff. And then it happened, and the floodgates opened up. Is that fair to say?

Bracken: Fair to say, and let me give you the reason. I believe Congress had been studying this for quite some time, but this is far more compelling than just VantageScore and our competitors, et cetera. As you know, the Harvard Joint Center for Housing’s demographic surveys tell us that over the next 20 years in America, 85% of the new household formation will be people of color. Those people have not been from the traditional home ownership domain. It’s just not been, the home ownership rates in the minority sectors is far less than the White population of America.

The emerging need, that tsunami of opportunity and need is coming at us and we need to be able to provide tools to America to meet that need. So, Congress recognized that we’re going to have to do something different because it is unfortunate, but the homeownership rate in America has been atrophying the last four or five years. In fact, the African American homeownership rate just reached the lowest level since the Civil Rights Act of 1968. Those policies and process and tools that we’re using, have been using, aren’t meeting that need, and so Congress said, we’ve got to do something different.

They passed this bill, included in it was credit score competition. They want competition in this marketplace to be able to develop those tools to meet that tsunami of need that’s coming at us. That’s why this is so compelling. And the lenders of America, obviously when you line up the equation here, if 85% of those new household formations are people of color, if you’re a lender and you’re not meeting that constituency, you won’t be in business very long. So that’s why it’s really important for them to adopt and to adopt VantageScore.

Wilkins: What is your best tip that you’d give to somebody in the industry to help them navigate through a potential downturn in the market? We had a big downturn in 2007, 2008. Some people are predicting that it’s not a question of if, but when, what would you say in just a general sense?

Bracken: Well it’s not secret sauce, but it’s part of the answer for I would say, I just mentioned that about the Harvard Joint Center for Housing’s demographics studies. We, VantageScore have a great relationship with the diverse segment real estate groups in America and it isn’t secret sauce, but if lenders aren’t involved and engaged in the diverse segments, and being able to meet the need of that constituency that is growing and emerging. And by the way, there’ve been so many research reports, people have asked that question after this credit crisis that we had. How many people still want to be a homeowner? Well, there are so many consumer surveys out there that tell us that every 10-year age segment in America, 25 to 35, 35 to 45 and up, that if you’re not a homeowner today, 90% of those people say that they have an incredible passion to be a homeowner.

If you’re not meeting that need in the diverse segments, you’re probably not going to be meeting the need for the constituency. So, that’s really important. And I would also say, it’s incredibly important for the lenders of America to be aligned with home builders for new construction. That’s a constant domain of opportunity and need for America, the new construction stuff. So, marrying those two together, diverse segments and new construction, is the ticket to success.

And I know for a fact, we can open the door at VantageScore to 10 million people that may be mortgage eligible in the near future. That is an immense amount of opportunity that I don’t know where we’d find more opportunity than flipping that switch. So, that’s why we’re working really hard to get into the mortgage domain.

Wilkins: So, speaking of that, and speaking of tsunamis that you’re talking about, and all these people coming onboard, is VantageScore poised to be able to have the bandwidth to help all those people and be a player in the credit scoring industry?

Bracken: We’re very proud of the fact that about 2,500 lenders have already adopted VantageScore in other credit segments. The transition for them into the mortgage space would be not much of a problem. So, it’s becoming a household name from zero like six or seven years ago to today. It’s been an incredible ride of market adoption and acceptance and it wouldn’t be that much of a problem for people to get into using VantageScore in the mortgage sector.

Wilkins: Now for a little bit lighter conversation. Tell us a little bit about yourself on a personal level, what you do for hobbies, any sports, family? What you like to do in all your spare time, which you probably don’t have very much of?

Bracken: So, I started in the business a long time ago after a brief career in professional baseball. Got injured and that ended the baseball career, which led me to my best baseball axiom, “A catcher that can’t squat is worth squat.” I got the chance to start a mortgage company from scratch for a bank in Illinois, and 11 years later we sold it to the Prudential Insurance Company. And I became the Managing Director of Prudential Home Mortgage, which we operated for a number of years, a lot of years before we sold the operations to Wells Fargo. And when I got to Wells Fargo, I got the chance to change roles and took over the government relations for a number of the businesses at Wells Fargo, which is a great transition for me.

I have found that this job demands, an intersection with groups that aren’t normally aligned with the mortgage industry per se. So, I work very hard at working diligently with the consumer groups, the civil rights groups, the diverse segment groups, fair housing and other groups. Because if we don’t know what their needs are and what their perceptions and observations, we won’t be able to design policy to meet that need that’s fair and equitable for all those entities.

And so last year I got the privilege of coming to work at VantageScore to be Managing Director in charge of the mortgage evolution for us, to get it in the mortgage space, and to run the government relations. So, it’s just been a great opportunity. This company is growing and we’ll be growing precipitously for the next number of years. The thing I love best about this is the opportunity to meet needs that haven’t been met. And knowing that, that marriage of meeting that need with the tools we can provide and, as I said, that tsunami of consumers that’s coming at us, this is a really cool space to be in.

And I’m now on the down slide of the glide path of my career. So, I’m just thrilled to be here at MBA. I was on the board of the MBA for 12 years and it’s a great organization. Everybody here has one mission and that’s to meet needs for consumers, where home ownership is, to make home ownership possible. And we’re just proud to be part of that.

Content has been edited for length and grammar.