Consumer Credit Bureaus Need Reform, Too
Mark Sunshine submits:
President Obama’s effort to reform the banking system doesn’t address the system’s biggest problem, which is how consumer credit is underwritten in the United States.
Without exception, no material consumer loan is made in America without the borrower’s credit bureau first being polled by prospective lenders and a credit score used to classify the borrower as good, bad or middle risk. Credit scores are supposed to accurately predict the probability of default by consumers, but in practice, credit scores don’t predict much of anything. Banks blindly rely upon the junk put out by consumer credit rating agencies and are getting burnt by ignoring the most basic rule of underwriting, which is to know their customer. While banks know borrowers’ credit scores and information on the credit report, that isn’t the same thing as knowing their customer or things like their customer’s assets, liabilities and earning power.
