Study finds more than 95% of asset-backed securitizations rely on FICO Scores
Recent data from independent research firm, Mercator Advisory Group, now a part of Javelin Strategy & Research, found that asset-backed securitizations (ABS) continue to rely heavily on the FICO Score as a risk and opportunity metric used to indicate credit quality in capital markets. The study found that more than 95% of asset-backed securitizations across seven collateral classes (i.e., Auto Leasing, Subprime Auto, Prime Auto, Student Loans, Time Shares, Consumer Finance, and Credit Cards) relied on FICO Scores to value their asset-backed securitizations in 2022. Year-to-date, FICO Scores remain at the top of the order for the collateral classes in the study.
The FICO® Score remains the dominant credit score used to assess credit risk in the securitization market.
“By far, FICO Scores are the dominant method to measure asset-backed securitization risk. There is some noise claiming alternative scores have traction, but if you look at the few firms that moved away from the FICO Score, you will often see deteriorating loan losses. Testing internal scores is one thing; moving away from the industry standard is another,” said Brian Riley, Co-Head of Payments Research at Javelin Strategy & Research. “Shifting credit scores, as losses rise, breaks the continuity that investors need to grade a portfolio. The FICO Score has proven to be consistent, predictable, and reliable over time. At a time when inflation and rising interest rates are a big concern, investors must have steady metrics that depict the ABS risk.”
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The study continues a 60-month review process and confirms the FICO® Score remains the dominant credit score used to assess credit risk in the securitization market. As lenders continue to navigate economic uncertainty, while facing rising interest rates and consumer price increases, lenders have continued to rely on FICO Scores when they brought asset-backed securitizations to Wall Street. Javelin has reviewed public ABS issued in eight asset classes in the U.S. between 2016 and 2022 to examine FICO Score usage. The FICO Score remains the dominant metric for indicating credit risk in the seven collateral classes with activity graded by top credit reporting agencies. Motorcycle securitizations, usually part of the eight collateral classes, did not have activity in 2022.
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FICO® Scores are used throughout the credit lifecycle, from acquisitions to applications, and credit management. One reason that the score plays such an important role in the ABS process is that it is a risk management metric used everywhere throughout the payment function. Lenders understand what the FICO Score means and know it is predictive across consumer collateral classes.
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