I’m sure most of you have heard of FICO scores. Fact is, probably you even know what yours is. The FICO score says how credit-worthy you are. It runs on a scale of 300 to 850. Basically, everything over 680-700 is considered a good credit score. Well, we sometimes forget that credit score are fairly new. They are the result of computer technology that has expanded greatly. Back in the old days, and by that I mean the 70s, we really didn’t have widespread credit cards. Most people established credit by getting a gasoline company credit card that you could only use at that particular company’s gas station. You were kind of expected to pay it back every month. There was also something out there called Diners Club, which was used for travel and entertainment expenses. It was a little bit difficult to get and also you were expected pretty much to pay it off every single month. 

Otherwise, people either had to go to a bank and get a bank loan, which wasn’t easy, or go to a loan shark … if they needed money all of a sudden. That was fairly unfair. It also constrained people. They had to live within their means. The reason we didn’t have widespread credit cards is that figuring out whether someone was credit worthy or not was expensive. You had to do a major investigation of their background. But with credit scoring and widespread use of computers, you basically could take a look at just about everyone’s spending and credit payment history. And that’s what credit scoring does. It reduces you to a single number. And credit card companies can decide based on that number, how much credit you should get or whether you should get credit at all. 

Now, credit scoring isn’t perfect; never was perfect. And back in the 1990s, I was the governor of the Federal Reserve in charge of consumer and community affairs. And that made me the person who technically was in charge of regulating the nation’s credit cards. And I would give speeches, I would urge people once they adopted credit scoring, to remember that it really is just rough justice. It’s an approximation and when people were rejected, companies should really take a second look at it. They needed to be sure that they weren’t making mistakes, that they weren’t doing things which were discriminatory, for example, but my speeches largely were ignored. 

And then came a personal experience which changed everything. I had two small children. I was a frequenter of Toys “R” Us, and Toys “R” Us came along with a new innovation. They would give you cashback, 2%, for all of the purchases you made at Toys “R” Us. That ran into hundreds of dollars for me. Well, I applied for the credit card, and I got rejected. Now remember, I’m the governor of the Federal Reserve who is in charge of regulating credit cards. Obviously, there was no second look. The reason I had gotten rejected is interest rates were coming down and I was trying to refinance my house, and so there were a lot of inquiries for me about my credit score. That inquiry, that number of inquiries, actually lowers your credit score, so it was kind of a circular function. Well, this is the swamp and I’m pretty adept at ways of the swamp, so I did a very swamp-like thing. I called up a good reporter friend of mine, David Wessel of The Wall Street Journal, and I said, “Have I got a story for you!” He grasped the ironies right away.

 And the story got prominent coverage in the Wall Street Journal that I had been rejected for a Toys “R” Us credit card. Well, all of a sudden, people started listening to me about the need for a second look. That was the intention. By the way, the nice folks at Toys “R” Us even gave me a call before I got in the office the day the story ran, and said you could have a Toys “R” Us credit card with an unlimited credit line. Of course, I couldn’t take it; that would be unethical. 

But the more important point was made, and the credit card companies started taking much closer looks at their credit-scoring models. One of the big concerns is something called disparate impact. Now, the credit card companies do not ask your race or your gender. But the standards they set, the questions that they ask, the criteria that they use — “how good are you at repaying your debts?” is the main one — do have a different effect on different ethnic groups. Groups that tend not to pay back as quickly as others, groups that live beyond their means and end up getting too deep in credit-card debt end up getting on average lower credit scores. 

In modern America, for example, Black Americans have as a group, on average, the lowest set of credit scores, They’re the only ones with credit scores under 680, for example. Well, in order to use criteria, you have to establish that if it does have a disparate impact, it has to be directly related to the credit worthiness of the applicant. So all of these criteria have been looked at. But despite that, you still have disparate impacts out there based on sociological factors. Well, the Biden administration has now discovered the problem of credit scoring and disparate impact, and has come up with, shall we say, a unique solution. 

When you apply for a mortgage and the mortgage goes through Fannie Mae or Freddie Mac, two of the big mortgage agglomerators who … take on a lot of the mortgages; about two-thirds of the mortgages go there. They’re going to raise the Fannie and Freddie fee if you’re credit worthy, and cut the Fannie and Freddie fee if you’re not credit worthy. Let me say that again, just to be clear. Credit-worthy people are now going to pay more. Deadbeats, people who don’t pay their credit cards back or live way beyond their means, are going to get subsidized by the responsible people who pay their debts. Now, this is bizarre, there’s no other word for it. The administration is not challenging the statistical premises of the credit-scoring tests, not at all. Those have been approved. 

Well, the difference is $40 a month. That’s $14,000 over the life of a loan that a credit-worthy borrower os now going to have to pay. Not only do they have to pay more, but that raises the income threshold on which you qualify. Right now for a typical house, you need about $85,000 to $86,000. Now, you’re going to need about $90,000 of income to qualify for exactly the same mortgage if you happen to be credit worthy. Now, let’s think about the absurdities here. 

First, there’s something we call moral hazard. It is simply wrong to punish the people who play by the rules and pay their bills back, and subsidize the people who don’t pay their bills back. For the government to do that is quite perverse. Then, at a time when houses are becoming more and more unaffordable and out of reach, they’re squeezing out tens of thousands, probably several million people, who happen to be credit worthy from being able to qualify for a mortgage.

And finally, it simply defies logic. If you think credit scoring has a problem, and I will testify that it does, then what you should do is you should try and work on the problems. If something isn’t working, it isn’t fair, then the worst thing you can do is make it a more relevant criteria by throwing on this extra tax based on the criteria that you’re complaining about. It’s illogical. 

Well, this all stems from a decision by President Biden when he came to office to end the typical cost benefit of new regulations. Instead of usual cost-benefit analysis, which is mathematically and statistically based, he put in a set of criteria that one could only define as “woke.” Decisions were supposed to be made on the racial and environmental justice that the regulation was trying to promote. Well, when you throw out math, when you throw out statistics, and you go on to something that isn’t measurable, you’re going to be ending up approving some genuinely stupid and counterproductive ideas. I wish I could tell you their credit scoring was the only one of these. It just happens to be the one I know the most about.