Time to end black-boxing
While everyone is up in arms about bankers bonuses and the lending practices that led to the credit crunch the bigger picture of fair and open practices within the financial services industry seems to have fallen by the wayside to a culture of pandering to politically driven objectives.
One thing that most definitely flies in the face of the FSA’s treating customers fairly objective is the practice of credit scoring and what is referred to as black boxing. Black boxing is one of the terms used to describe the elements of a lenders credit scoring criteria that are kept secret and undisclosed.
While I don’t think that using a system of credit scoring is unfair or bad practice I do believe that it is unfair to keep any part of the methodology behind a scoring system secret. Firstly there have been a lot of issues with lenders accepting a decision in principle from an applicant which obviously incurs no cost, and then declining a mortgage application based on the secondary scoring of the application.
There is an obvious issue with this practice particularly where funds are limited in supply in that it leaves the lender open to accept many more applications than they can possibly fund while accepting application fees and booking fees (many of which are now charged up front) and declining an application post valuation. Interestingly many lenders also now include administration fees within their basic valuation fee, or have moved free valuation incentives to the back end of the deal asking you to pay for a valuation then refunding the costs upon completion. Several newspapers have also reported that many lenders are now removing the right for mortgage brokers and consumers to contest valuation figures on deals with free valuation incentives as a way of forcing borrowers into a higher loan to value product.
It’s also well known that while the idea of a credit blacklisting is a bit of a myth it is true that lenders may apply a weighting to their credit scoring systems that is based on geographic location for example. Some streets or postcodes may be dragged down on score based on the lenders experience in the area which may make it more difficult for people residing there to get credit. Now take this concept and how do we know that ethnic groups for example are not being penalised, which would naturally be illegal under racial discrimination laws? The simple answer is we don’t because we can’t see how these decisions are being made. Which means it’s bad for public faith in the industry and consequently the industry as a whole.