1. © 2014 Fair Isaac Corporation. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent. FICO ® Score Fundamentals Julie Wooding Solution Consulting, Principal Consultant FICO

2. © 2014 Fair Isaac Corporation. Confidential. Hear answers to your questions about the FICO ® Score 2

3. © 2014 Fair Isaac Corporation. Confidential. ► FICO™ pioneered credit bureau scoring modeling technology ► FICO has partnered with all five major credit bureaus in the United States and Canada ► More than 150 billion FICO ® Scores have been sold to date ► Powers 10 billion+ decisions a year ► 70,000+ businesses rely on FICO ® Scores ► FICO ® Scores enhance decision-making ► Across lenders of all credit industries ► Across various decision points such as approval/denial, marketing and portfolio management ► Use of FICO ® Scores has expanded into non-traditional markets such as rating agencies FICO ® Scores—Expertise 3

4. Agenda © 2014 Fair Isaac Corporation. Confidential. ► Scoring Basics ► Inside the FICO ® Score ► Setting Score Cutoffs ► FICO ® Scores Across the World ► FICO Score 9: A Preview ► FICO’s Model Management Program 4

5. © 2014 Fair Isaac Corporation. Confidential. Scoring Basics 5

6. © 2014 Fair Isaac Corporation. Confidential. Credit Risk Scoring ► A statistical process ► Convert into a numerical score information from: ► Credit applicants ► Existing accountholders ► This score is regarded as a measure of the credit risk (i.e., the probability of repayment) Concepts of Scoring 6

7. © 2014 Fair Isaac Corporation. Confidential. ► Scorecard: ► Mathematical model used to assess credit risk ► Odds: ► Is the ratio of one event to another ► In credit scoring it is defined as the ratio of goods to bads ► Example: Good/bad odds of “4 to 1” (also 4:1) ► Of 5 applicants approved, approximately 4 are likely to be good payers, 1 is likely to be a bad payer ► Bad definitions may differ for different types of models ► It is a measure of risk ► For FICO ® Scores, it represents the probability of future delinquency Scoring Definitions 7

8. © 2014 Fair Isaac Corporation. Confidential. ► Characteristic ► A question about the credit bureau report ► Examples: ► Number of bankcards ► Number of 90+ day delinquencies ► Attribute ► Answer given by credit bureau report ► Examples: ► Number of bankcards = 3 ► Number of 90+ days delinquencies = 2 Scoring Definitions 8

9. © 2014 Fair Isaac Corporation. Confidential. Types of Scores Credit Scores Non-Credit Scores Risk Scores Non-Risk Scores Credit Bureau- Based Scores (FICO) Application Scores Behavior Scores AttritionResponseRevenue 9

10. © 2014 Fair Isaac Corporation. Confidential. “Odds quote” based on the general population— not necessarily applicable to any one lender. Specific lender's applicants will still “rank order”. Scores Are Designed to Rank Order 620 640 660 680 10

11. © 2014 Fair Isaac Corporation. Confidential. FICO ® Score Models in Place at All Major US and Canada Credit Reporting Agencies A model is developed separately on each CRA’s data to maximize predictive power on unique data elements available 11

12. © 2014 Fair Isaac Corporation. Confidential. ► Inquiries ► Mortgage Update ► Home Equity Loan Update ► Public Record Data ► Bankcard Update ► Auto Loan Update ► Department Store Update What Is in a Consumer Credit File? 12

13. © 2014 Fair Isaac Corporation. Confidential. “The Five Information Zones” Sample Credit Report 1 2 3 4 5 13

14. © 2014 Fair Isaac Corporation. Confidential. The Relationship “Connection” Consumers Credit Grantors MyFICO.com Scoreinfo.org FICO ® Score Open Access 14

15. © 2014 Fair Isaac Corporation. Confidential. Credit Bureau Risk Score Products—US Product Classic FICO ® Score ► FICO ® Risk Score, Classic ► FICO ® Risk Score ► FICO ® Risk Score, Classic Classic FICO ® Industry Scores ► FICO ® Auto Score ► FICO ® Bankcard Score ► FICO ® Mortgage Score ► FICO ® Risk Score, Classic Auto ► FICO ® Risk Score, Classic Bankcard ► FICO ® Mortgage Score ► FICO ® Auto Score ► FICO ® Bankcard Score ► FICO ® Mortgage Score NextGen FICO ® Score ► FICO ® Risk Score, NextGen Bankruptcy Model— ► FICO ® Bankruptcy Risk Score ► FICO ® Bankruptcy Score FICO ® Credit Capacity Index TM ► FICO ® Credit Capacity Index — — FICO ® Economic Impact Index ► FICO ® Economic Impact Index —— 15

16. © 2014 Fair Isaac Corporation. Confidential. Inside the FICO ® Score 16

17. © 2014 Fair Isaac Corporation. Confidential. The FICO ® Score is a summary of the information on a consumer’s credit file. It is a single 3-digit number ranging from 300–850 which rank-orders consumers according to risk. Higher scores equate to lower future risk of default. 17

18. © 2014 Fair Isaac Corporation. Confidential. Predictive Characteristics Develop final scorecards Library of 800+ characteristics Core group of 40 most predictive characteristics 18

19. © 2014 Fair Isaac Corporation. Confidential. Predictive Characteristics Trade lines Inquiries Collections Public Records Age Address Employment Income Gender Considered Not Considered      19

20. © 2014 Fair Isaac Corporation. Confidential. Bureau Snapshot Scoring date Bureau Snapshot Performance date Development Data 2 years 20

21. © 2014 Fair Isaac Corporation. Confidential. Enhanced Core System—US FICO ® 8 Score Segmentation NoYes Presence of Serious Delinquency/ Derogatory Items ? ► Public record ► Worst rating Credit Bureau File ► Thickness of file ► Age of file ► Recency of new openings 8 Return Final FICO ® 8 Score 8 Non-Derogatory Scorecards Return Final FICO ® 8 Score 4 Derogatory Scorecards 4 3 2 1 7 6 5 4 3 2 1 21

22. © 2014 Fair Isaac Corporation. Confidential. Five Categories of FICO ® Score Predictive Characteristics 1. Payment History 35% 5. Credit Mix 10% 4. Pursuit of New Credit 10% 3. Credit History Length 15% 2. Outstanding Debt 30% 22

23. © 2014 Fair Isaac Corporation. Confidential. Key Factors ► How recent is the most recent delinquency, collection or public record item? ► How severe was the worst delinquency— 30 days, 90 days? ► How many credit obligations have been delinquent? 1. Payment History 1. Payment History 35% 23

24. © 2014 Fair Isaac Corporation. Confidential. Example Payment History Months Since Most Recent Major Delinquency High Low 0–11 24–3536–47 48–High No Delq Risk 12–23 24

25. © 2014 Fair Isaac Corporation. Confidential. Key Factors ► How much does the consumer owe creditors? ► What percentage of available credit card limits is the consumer using? ► What percentage is outstanding on open installment loans? 2. Outstanding Debt 30% 25

26. © 2014 Fair Isaac Corporation. Confidential. 0–19%40–59%60–79%80–99%100+%20–39% High Low Ratio of Total Balances to Total Limits on Revolving Accounts Risk Example Outstanding Debt 26

27. © 2014 Fair Isaac Corporation. Confidential. Key Factors ► How long have accounts been established— average number of months accounts have been open ► New accounts—number of months since most recent account opening 3. Credit History Length 15% 27

28. © 2014 Fair Isaac Corporation. Confidential. 0–2324–4748–7172–119120+ High Low Risk Number of Months Since Oldest Revolving Account Opening Example Amount of Credit History 28

29. © 2014 Fair Isaac Corporation. Confidential. Key Factors ► Inquiries: Number of recent inquiries (12 months) ► New accounts—number of trade lines opened in last year 4. Pursuit of New Credit 10% 29

30. © 2014 Fair Isaac Corporation. Confidential. Example Pursuit of New Credit 234–High 01 Young/Thin filesMature/Thick files High Low Risk Number of Inquiries 30

31. © 2014 Fair Isaac Corporation. Confidential. ► FICO ® Scores only consider consumer-initiated inquiries for credit posted in the last 12 months ► FICO ® Scores do not consider the following inquiries: ► Promotional inquiries ► Account review inquiries ► Consumer disclosure inquiries ► Insurance inquiries ► Employment inquiries Types of Inquiries 31

32. © 2014 Fair Isaac Corporation. Confidential. ► The FICO ® Score models observe inquiries over a 12-month period ► Auto-, mortgage-, and student loan-related inquiries that occur 30 days prior to scoring have no effect on the score. Outside this 30-day period, auto-, mortgage-, and student loan-related inquiries that occur within any 45-day period are treated as a single inquiry Inquiry De-Dupe Logic * * * 45 day de-dupe * 30 day buffer 12 MonthsScoring Date 32

33. © 2014 Fair Isaac Corporation. Confidential. Inquiry De-Dupe and Buffer Period Type# of Days Ago Auto8 Not Counted (Ignore within 30 days) Auto9 17 Mortgage35 Counted as 1 Inquiry (De-dupe within 45 days) Mortgage47 Mortgage56 Mortgage79 Dept. Store90Counted as 1 Inquiry 33

34. © 2014 Fair Isaac Corporation. Confidential. Key Factors ► What is the mix of credit product types? ► Revolving credit—number of bankcard trade lines ► Installment credit—percent of trade lines that are installment loans 5. Credit Mix 10% 34

35. © 2014 Fair Isaac Corporation. Confidential. ► Not deceased ► One trade line open at least 6 months ► One undisputed trade line updated in last 6 months Minimum Scoring Criteria—US 35

36. © 2014 Fair Isaac Corporation. Confidential. ► Up to four reasons returned (plus a 5 th related to inquiries, if necessary) ► Selection and order based upon difference from maximum points ► Reasons returned on-line and in account management runs FICO ® Score Reasons Codes (Score Factors) 36

37. © 2014 Fair Isaac Corporation. Confidential. Example FICO ® Score Reason Computation Boxed numbers represent the maximum points possible (*) minus the actual points received. #1 #2 #3 #4 CharacteristicAttributesPoints Number of bank card trade lines 015 122 230 340* 4 or more30 Number of trade lines with balance >0 0–165* 255 3–450 5–740 8+30 Number of months in file Below 1212 12 to 2335 24 to 4760 48 or more75* Number of months since most recent bankcard opening 0 to 520 6 to 1125 12 to 1730 18 to 2338 24 or more45* Number of months since most recent derogatory public record No public Record75* 0 to 510 6 to 1115 12 to 2325 24 or more45 10 15 40 25 0 37

38. © 2014 Fair Isaac Corporation. Confidential. Setting Score Cutoffs 38

39. © 2014 Fair Isaac Corporation. Confidential. ► Setting a cutoff when using a new score can be challenging ► Two pieces of information are required: ► Volume distribution: how the applicant population will distribute on the new score ► Performance: how the new accounts are expected to perform on the new score ► Lenders will have required data: ► If adopting a new custom score ► If they performed a retrospective validation Cut-off Score Selection 39

40. © 2014 Fair Isaac Corporation. Confidential. An Approach to Setting Cutoffs ► This chart provides both required items: ► Distribution of applicants (a proxy) ► Associated performance (an estimate) ► Lenders can use the odds chart to determine initial cutoffs FICO Validation Odds Chart 40

41. © 2014 Fair Isaac Corporation. Confidential. Gives information about applicants scoring ABOVE a given score: the potential ACCEPTS Descending Score Distribution 41 350400450500600650700750800550850

42. © 2014 Fair Isaac Corporation. Confidential. ► A lender will set their cutoff based on their risk appetite ► Option 1: Cumulative projected bad rate of approved population Setting Cutoff for a New Score 42

43. © 2014 Fair Isaac Corporation. Confidential. ► A lender will set their cutoff based on their risk appetite ► Option 2: Marginal bad rate or odds of highest risk approved applicant Setting Cutoff for a New Score 43

44. © 2014 Fair Isaac Corporation. Confidential. ► A lender will set their cutoff based on their risk appetite ► Option 3: Breakeven point—for example ► Average good = $200 revenue, Average bad = $2,160 loss ► Breakeven point would be where odds of highest risk applicants equal “breaking even”, at 660–679, expect 10.8 goods for every bad: 10.8 x $200 = $2,160 Setting Cutoff for a New Score 44

45. © 2014 Fair Isaac Corporation. Confidential. ► A lender may use a combination of all three options, setting their cutoff based on their risk appetite as well as the revenue and profit implications ► Cutoffs should be set considering: ► Anticipated applicant distribution ► Desired approval rate ► Risk inherent in proposed approved population ► Expected losses, revenue, and profit from proposed strategy ► Subsequent observing and tracking of performance is critical ► Start basic, refine strategies based on observed performance Setting Cutoff for a New Score 45

46. © 2014 Fair Isaac Corporation. Confidential. FICO ® Scores Across the World 46

47. © 2014 Fair Isaac Corporation. Confidential. FICO ® Scores for International Markets Source: World Bank. 2013. Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises. Washington, DC: World Bank Group. DOI: 10.1596/978-0-8213-9984-2. License: Creative Commons Attribution CC BY 3.0 FICO Score Deployment Legend FICO ® Score Deployed FICO ® Score Available at Credit Bureau FICO ® Score Capable Credit Information Legend Positive & Negative Data Sharing Negative-only Data Sharing No Data Sharing 47

48. © 2014 Fair Isaac Corporation. Confidential. FICO ® Scores Family—International FICO ® Scores are feasible in any country with recognizable bureau data. FICO ® Score for lenders FICO ® Score at Bureaus ► Japan ► Mexico ► Panama ► Peru ► Poland ► Sweden ► Taiwan ► Thailand ► Turkey ► ICB—Ireland ► I-Score—Egypt ► ACSP—Brazil ► Benefit Co.—Bahrain ► Biroul de Credit—Romania ► CBS—Singapore ► NBKI—Russia ► Trans Union—South Africa ► SIMAH—Saudi Arabia ► Circulo de Credito—Mexico 48

49. © 2014 Fair Isaac Corporation. Confidential. ► FICO ® Score developed following same design principles, where data allows ► Development approach strives to maintain similar five categories of predictive variables ► Unique data elements available in other countries can be incorporated into the FICO ® Score models FICO ® Scores for International Markets 49

50. © 2014 Fair Isaac Corporation. Confidential. FICO ® Score 9: A Preview 50

51. © 2014 Fair Isaac Corporation. Confidential. FICO ® Score 9 Outperforms All Prior FICO ® Score Versions Across All Industries and Lifecycle Stages 51

52. © 2014 Fair Isaac Corporation. Confidential. ► Numerous changes have occurred since FICO ® Score 8 was developed ► A unique approach to development was required ► New and different treatment of certain items was introduced ► FICO ® Score 9 is: ► A more predictive score ► Based on current consumer behavior ► Reflective of evolving credit landscape ► Lenders can: ► Upgrade to FICO ® Score 9 with ease ► Backward compatibility and limited IT and operational impacts ► Comply more easily and confidently with relevant US regulations ► Enjoy a stronger, more predictive score to make better decisions ► Learn more details in our FICO ® Score 9 Showcase! FICO ® Score 9 Summary 52

53. © 2014 Fair Isaac Corporation. Confidential. FICO’s Model Management Program 53

54. © 2014 Fair Isaac Corporation. Confidential. ComplianceCOMPLIANCE On-Going Regulation Assessment ► ECOA and Reg B ► FCRA plus Dodd-Frank and FACT Act ► FDIC Large Bank Pricing ► GLB ► Basel III ► International regulations SAFETY & SOUNDNESS FICO maintains procedural controls underlying the FICO ® Score as prescribed by OCC/Fed Model Management Guidelines ► Data Management ► Model Development ► Model Validation ► Process Standardization ► Governance ► Documentation ► Communication INNOVATION FICO monitors model effectiveness, accuracy, and predictive power, delivering value and innovation ► Gov’t Affairs liaisons ► FICO ® Model Central™ Solution ► Adoption Services ► Partnering with key industry leaders in development and future innovation FICO’s Model Management Program 54

55. © 2014 Fair Isaac Corporation. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent. Julie Wooding jwooding@fico.com Thank You!

56. © 2014 Fair Isaac Corporation. Confidential. Learn More at FICO World Related Sessions ► The FICO Score: 25 Years of Democratizing Access to Credit ► Fact vs. Fiction – Demystifying Credit Score Features Products in Solution Center ► Unveiling FICO ® Score 9 Experts at FICO World ► Julie Wooding ► Freddie Huynh White Papers Online ► To Score or Not to Score? #70 Blogs ► www.fico.com/blog 56

57. © 2014 Fair Isaac Corporation. Confidential. Please rate this session online! Julie Wooding jwooding@fico.com 57