A more inclusive credit score for lending and securitization, with Toni Hubbs

Credit scores are near to my heart. I kinda work around them now, but still, I spent a wonderful decade rolling the things out and so I’m getting back to my roots. In today’s episode, Toni Hubbs talks to me about how the team at VantageScore is driving inclusion and transparency in credit scores at scale (a really, really big scale), and about how and why those scores are being used in securitization deals.

Head on over to https://vantagescore.com/ to find all their educational material

You can find The Score, VantageScore's own podcast on their website, https://vantagescore.com/lenders/tools-and-resources/the-score-podcast/ and wherever you're listening to this one.

You can learn more about myself, Brendan le Grange, on my LinkedIn page (feel free to connect), my action-adventure novels are on Amazon, some versions even for free, and my work with ConfirmU and our gamified psychometric scores is at https://confirmu.com/ and on episode 24 of this very show https://www.howtolendmoneytostrangers.show/episodes/episode-24

If you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.

Regards,

Brendan

The full written transcript, with timestamps, is below:

Toni Hubbs 0:00

We work very hard to ensure that we provide transparency to the market, and we're working on increasing that every day so that the market understands what a VantageScore means.

But then, on the other side of that, we can't forget the fact that the model is more inclusive. So using VantageScore, there is the potential to stay within those risk targets that you're looking for, in terms of the score band and the risk that's associated with a certain risk band, but to capture those that have traditionally been excluded from the market.

Brendan Le Grange 0:43

If you've listened to the show before, you will have heard me talk about how I've worked in lending across three continents - that international journey started when I left South Africa to take up a role with Experian in the Nordics. I subsequently left that role for an opportunity in Hong Kong that, let's just say didn't quite pan out as I'd hoped. I was in a new city that I loved but a role that I didn't so I was delighted when I got a call from a recruiter looking for people with 'credit bureau experience', a box that my resume ticked thanks to that time with Experian.

The statute of limitations on that has now expired, so I can say this, but there was a big internal wall between departments so I sold software and built scorecards and consulted on in-house scorecard driven strategies, and I never once looked closely at what the bureau score was doing until I got that new job.

TransUnion had reenergized their Asian ambitions and had a dozen people building a credit bureau in the Philippines, and for the first time, I got to see firsthand how powerful a bureau score can be. I work in alternative scoring now -check out ConfirmU's gamified psychometric scorecards in Episode 24 of this show - so I know that traditional scores are not the be all and end all of credit risk assessment, but they are the default for a reason.

So in today's episode, I take a closer look at VantageScore, one of the most important credit scores in the world. Welcome to How to Lend Money to Strangers with Brendan le Grange.

Toni Hubbs, Senior Vice President of Capital Mmarkets and Strategic Alliances at VantageScore, welcome to the show.

My own background includes rolling out some of the first national-level bureau scores in the Philippines, in Thailand, and in Malaysia so credit scores are a topic that's very close to my own heart and I'm very much looking forward to getting into the nitty gritty of the VantageScore product - but before we do that, let's talk about your route into the role.

You've had a diverse and very interesting background that is brought you to VantageScore relatively recently, so if you don't mind, could you give us a bit of your background? What shaped you to the person you are today? And how has that brought you to the role that you now have with VantageScore?

Toni Hubbs 3:12

Absolutel, Brendan, thank you so much for having me today.

I'm so happy to have this conversation with you. As you mentioned, I'm Senior Vice President of capital markets and strategic alliances at VantageScore and in that role, I've worked closely with participants across the capital market space, including issuers, investors, rating agencies, and other key constituents to facilitate the adoption of VantageScore - mostly in the securitization market.

Prior to VantageScore, I was really fortunate to have served as a senior leader across the capital market space. I was a senior ABS ratings analyst at Moody's and DBRS Morningstar, and at Moody's I was responsible for authoring their monthly credit card index. I've also worked as an executive at Commerce Bank and Dresner Kleinworth. And I lead the ABS management team and was responsible for the risk and portfolio management of various multibillion dollar businesses across the globe, including North America, Latin America, Europe, Australia and Asia. I've also held senior roles at GE Capital and JP Morgan Chase and First Data.

So I feel that having worked in various parts of the market, I've been an investor, I've been an issuer, I've been a ratings analyst.

I feel as though that it has prepared me well for this role to deal with various market participants and educating them about VantageScore and to work with them to facilitate a securitization in the space.

Brendan Le Grange 4:40

Yeah, so let's talk about educating about VantageScore because I hate to use a competitor's name in your interview, but the fact is that FICO is to credit scoring for what Hoover is to vacuum cleaners and Kleenex is to tissues. So in a world where everybody, when they think of credit scores, they think of a FICO credit score that's been there 80 years, what was the vision behind the Vantage score? And what are you bringing to the market that's different, that people might not know about?

Toni Hubbs 5:10

That's a great question. VantageScore was founded in 2006 by Experian, Equifax, and TransUnion. And a guiding principle for VantageScore, from its inception, is to leverage data and analytics to drive innovation and inclusion. Importantly, in addition to providing greater access to credit to consumers, and helping lenders make better lending decisions, at the end of the day.

We use the same standard of care across the credit spectrum, and we actively seek new ways to innovate the scoring process. It's the architecture of our model that allows us to score approximately 37 million more individuals than conventional models. And interestingly, to note about that 37 million, approximately 10.7 million are members of the Black and Latino communities who have historically often been underserved. And approximately 3 million of those have scores that are above 620, which is generally considered those that will be eligible for traditional lending products.

So inclusion and broadening access to credit and being predictive have been guiding principles for VantageScore since its inception.

Brendan Le Grange 6:23

And it's clearly been very widely used in the industry as well. I had a look at your website, and I think for the last year, 14.5 billion scores produced. So, as you said, scoring the vast majority of American adults - who is using the Vantage score, what sort of clients are you working with?

Toni Hubbs 6:40

We work with various institutions, and you stole my thunder a little bit, but that's okay: yes, recently a report was released whereby we saw that over 14.5 billion (billion with a B_ VantageScores were used between March 2021 and February of 2022. We see various types of institutions have used VantageScore. Throughout their origination and account management processes, 9 out of the top 10 banks and also 30 of the top 50 banks use VantageScore in their processes.

And we've seen an increase of over 18% since 2019, that's phenomenal for us, shows that there's an appetite for competition in the scoring space. And it also speaks to the confidence that lenders and other participants have in VantageScore at the end of the day.

Brendan Le Grange 7:41

I've had two different roles within credit bureaus. In the first role I had, I was on the analytics and consulting side of the business and the credit score was on the other side of the fence in terms of organisational structure. So I never actually looked at the credit score that much, it was something that was just there and that took for granted. Later in my career, I started dealing directly with national level credit bureau scores, not your score, because I haven't worked in the North American market, but similar ones, and I was amazed at the predictive power that's embedded in these three digit numbers. We can talk about Super prime and prime and for most conversations, that's the level we need to talk, but I was amazed when I saw just how much power there is in a traditional credit score.

What does the VantageScore look like? What information is telling people? And I guess, given the state of the world today, how is it holding up to all the changes we're seeing coming about?

Toni Hubbs 8:34

Effectively a credit score as a way to rank order risk, if you will, amongst consumers - and when we're talking about pools of portfolios across the pool of portfolios. And it can provide insight as to expected performance characteristics for either an individual consumer or for a portfolio of loans. In terms of the predictive power, we have outperformed traditional credit scores.

What we've tried to do along with being the most inclusive and the most predictive, we also strive to provide transparency to the market. We publish a model performance assessment on an annual basis, which shows how our models stand up against conventional scores. And also previous versions of our our models. Our latest model performance assessment showed that the model held up quite well. And also there was a bit of lifts over the period of COVID where one would have expected there to be, you know, potential stress.

Brendan Le Grange 9:39

Yeah, that's interesting, because it was a period of time when it started, certainly with a lot of unknowns and lots of questions about how would the scores hold out. And yeah, although the levels are maybe moving up and down, it was quite interesting to see how things could hold out and the people that the model sees as risky tend to be the ones that are risky in these situations. So perhaps a lot more stability, at least in terms of tools, than we might have expected, given all the volatility and everything else.

You've mentioned a few times now about being the most inclusive. And there was a number there when I was looking at your website that really grabbed my attention when you talk about being able to score approximately 96% of American adults now, with the VantageScore, with the latest version, what is it that you're doing differently? And how are you bringing this sort of new try for inclusivity to the market?

Toni Hubbs 10:29

Well, I am not a data scientist, so that's the first disclaimer, but honestly, it's the architecture of the model that allows us to score more individuals that may otherwise not be able to obtain a credit score, and thus be left out of participating or obtaining traditional lending products. Over time, we have discovered various data sets, if you will, and we've come to understand what information is in fact predictive, and what information actually is not predicted.

One of the things that really attracted me to coming into the company is the fact that part of the core mission of VantageScore is to be more inclusive, but doing so in a predictive and in a transparent way. And with again, using the same standard of care across the credit spectrum.

Brendan Le Grange 11:24

Yeah, I think that's a good point to to underline, because obviously, there's the drive for alternative data and then there's the spectrum of alternative data from very stable alternative data like utilities and rental to then some of the more exotic forms of it, where there will be some experimentation, there'll be some value to be found there in a model, but do we have that same sort of care, do we have that same sort of transparency in that space? Not always.

Toni Hubbs 11:50

And just to speak that point, Brendan, we recently announced that we are excluding medical collections from the score, as it proved to not be a good determinant of how one would perform.

Brendan Le Grange 12:04

Yeah, I love that. Because sitting outside America and looking in, it's always one of those aspects of the American credit system that looks very strange. They've arrived there not through any decision they've made, or through any of their active behaviours, but rather, because they've caught some disease or been involved in some accident.

Now, my own background in using credit scores has been fairly simple. And we young somebody applies for a loan, or we're considering somebody for a credit limit increase, we pull a credit score, we see how risky it is, and we make our decision. That's not the only area that these are being used for anymore. In your role, you talk a lot to people that are doing securitization.

Securitization is something I'm familiar with from hearing the term and particularly in terms of mortgages and such. I think I know what it is, but maybe we should start with some basics. When you talk about working with partners that are doing securitization, what does securitization mean? And who is doing this?

Toni Hubbs 13:01

Thank you for that question. I I never turned down the opportunity to discuss securitization, because I've been in the business for so long, just again, really high broad view on this. securitization is a process whereby an originator or lender issues through various legal and structural mechanisms, they issued notes that, broadly speaking, are backed by the cash flows that are generated from the underlying asset.

As an example, a credit card securitization, the payments of those notes that are secured by that pool of credit cards would be backed by payments that consumers make on those credit card assets. So the risk is very much tied to those cash flows and very much tied to the behaviour of the consumer, whether they pay or not, when do they pay the yield that is accruing or is a charge to the consumer. All of these things play a factor on the performance of the overall securitization.

So the performance of the consumer has a direct impact on the performance of the notes that are being issued. And the distinction broadly speaking, versus say general corporate debt is that the investor in a securitized transaction, they're backed by the payments that are associated with the underlying securitize pool versus, say, the general obligation of a corporate issuer

Brendan Le Grange 14:38

And from a lender's point of view. What is the benefit to securitizing?

Toni Hubbs 14:44

That's a great question and I've watched the market evolve and grow by leaps and bounds over the years (I won't disclose how many, but several years).

Securitization can actually be a critical part of a lenders funding framework, at the end of the day, it helps them manage their balance sheet. And so effectively it plays a role in enabling institutions, ongoing operations, and to facilitate additional lending to its customers, I will make a bit of a distinction, perhaps a broad distinction between, say larger lenders and smaller lenders, for larger lenders, you know, it's a way to enhance their sources of funding and to diversify their sources of funding and to also potentially gain benefits regarding capital that the institution must hold against its assets on its balance sheet.

For smaller lenders, in addition to it being a source of funding, it may also allow them to access capital at a lower cost than perhaps they would be able to do so if they were to issue say, a general obligation corporate note, if they would even have access to such a form of financing. So it really is a critical part of the ecosystem, because it actually allows lenders who continue lending, if you will, and it really does support their ongoing operations.

Brendan Le Grange 16:05

And I guess, then, it's a way as well, in that startup space, to use your good business practices, your existing business where maybe at startup stage, you got some very expensive capital from venture capitalists who believe in your future potential, and then you set up the business and you actually lay into your first quarter 10,000 customers, so you use that capital. And now you want to keep growing, you can say, look, I've got 10,000 customers, I've lent them $1,000 each, yeah, here's the terms, here's the risk, come see, and you can sell that off, get it off your balance sheet, get more capital into lend to the next 10,000.

So it's not about promising the world to investors, it's about actually the business you've already done in the last X number of months. And you turn that back into fresh capital.

Toni Hubbs 16:48

Absolutely. And today's small small lender is tomorrow's large financial institution.

Having said that, wherever you are in the lending process, whether you are looking for, say, revolver or venture capital, or any form of financing, even in the structured finance, market policies and processes and how you assess risk is a critical factor in the funding process, if you will, lenders are asked about that. And that's where, you know, VantageScore can help lenders in that space.

Brendan Le Grange 17:25

Well, let's talk about that. So when it comes to securitization, where does the VantageScore come in? How is this giving fresh insights into this aspect of the lending process?

Toni Hubbs 17:36

We've seen lenders use VantageScore across their processes. And effectively, there are a number of benefits, but I'll focus on the predictability and the transparency and also the inclusion.

So you know, year after year, we've shown that our model is predictive, and that helps lenders make great lending decisions. And it also helps investors when looking at a transaction that quotes VantageScore in its portfolio distribution, it really gives a good picture of what the potential performance could be. And that's why we work very hard to ensure that we provide transparency to the market. And we're working on increasing that every day so that the market understands what a vantage score means, from a risk perspective, again, predictiveness and transparency.

But then on the other side of it, we can't forget the fact that the model is more inclusive. So I've had various conversations over the last year or so regarding financial inclusion and credit performance. And I guess the best way of explaining it is if you're a lender, or you are an investor, and you are targeting a certain credit band for your portfolio, if you're looking at a transaction with another model, traditional model, then you have a certain universe of underlying consumers and using VantageScore, there is the potential to stay within those risks targets that you're looking for in terms of the score band and the risk that's associated with a certain risk band, but you're able to perhaps capture those that have the same risk profile at the end of the day.

However, they have traditionally been excluded from the market. So you're kind of bringing financial inclusion into a securitized portfolio

Brendan Le Grange 19:46

Also more independence.

And this is a bit dangerous, because you were in the rating agency world and I'm not so I'm speaking primarily from ignorance, but if I think about the rating agencies get a you know, three letter code a BBB or whatever system they Using but a very high level code to give you a risk of a whole country, we know each individual mortgage right down to the three digits after the decimal point in terms of the likelihood of of defaulting of every loan product that's in there, that we can roll up in far more detail than a letter grade might represent. And it's not to the buyer or the seller in these sort of agreements. It's been done at the individual level being used for every sort of decision in the lending process. So it's not something that's as prone to the pressures of Yeah, should occur up a little bit or down a little bit.

But maybe I'm being a little bit unkind on the rating agencies in terms of that space. When you look at securitization, is this the same vantage score that everybody knows and loves and uses when they doing the acquisition strategies, or do you also have specialist scores that work in the space?

Toni Hubbs 20:51

A VantageScore is a VantageScore, we are consistent. So if you see a 700 VantageScore in the origination process, it's the same as VantageScore and the account management process - so there there is no distinction. And I think that that's important, such that there is that level of continuity, and you have uniformity and also transparency. Everything can be measured with the same scale and with the same understanding of what what a VantageScore means at the end of the day.

Brendan Le Grange 21:25

You could be a big bank with 50 million customers, and you can talk about your in house scores. And you can tell that to the securitization people and you'll have all the actuaries and auditors you need to get that done. But the small startup maybe doesn't have that same ability, but they can refer to the Vantage Score because a VantageScore is a Vantage score. So you could have a tiny portfolio, the model that's been used is understood and tested and validated across millions and millions of consumers, billions and billions of scores every year, which I think yeah, is is great in the sort of world where we're trying to let smaller players compete with the big ones to improve access to products for consumers.

Toni Hubbs 22:04

Exactly.

And it's a way of standardising the rank ordering of a risk, whether it's with respect to again, an individual consumer or across a securitized portfolio and we're seeing more and more issuers, sizable issuers, leading issuers, in their respective spaces use VantageScore, when quoting score distributions within their securitized portfolios.

Brendan Le Grange 22:29

Well, Tony, it's great to have you on my show. But I see that also VantageScore has its own podcast as well, The Score with Jeff Richardson now.

Toni Hubbs 22:37

Absolutely, and I am a fan. Not just because I work for VantageScore, Jeff's done a great job with working and speaking to individuals across the lending spectrum, and across the lending ecosystem where they share their their insights and challenges in in the space.

And it can have quite an impact on the capital market space at the end of the day. So I know that I always tune in. And for those that are interested in listening to the podcast, you can go to www.VantageScore.com. And also follow us on social media. And not only will you find our podcasts, you will also find other information related to our scoring our thought leadership, white papers, information on capital markets and other digital tools that provide an additional layer of transparency to the market. And we're trying to really add value across the lending ecosystem for borrowers, lenders, Capital Markets can constituents and other institutions that provide credit education to consumers.

So it's really www.vantagescore.com really is a wealth of information for various constituents.

Brendan Le Grange 23:53

Yeah, I'll echo that (and I'll put in the show notes) but I really do suggest people who are interested, go and have a look, I was scrolling through their feed in preparation for this, some really good articles and really good insight. As somebody from the scoring world, myself has become most impressed with the amount of detail you've got there on the scores performance. And it's incredibly detailed. And I've used other documents of yours in the past when I'm looking for a benchmark, talking about inclusivity. You've got your score rated various population groups and things. So there's a wealth of information.

Toni, before we go, obviously, credit scoring and sort of underlying audit scores is always changing. The world around us is always changing. What should people be looking for next?

Toni Hubbs 24:39

I think at the heart of all of it. VantageScore is always innovating at the end of the day. And again, we're always looking to see how we can best serve the market, because it is important for us to add substantive value to the lending ecosystem. And I feel VantageScore has done a great job of serving various constituents, whether that be through the You know, exploration of leveraging new data, and providing thought leadership around issues that will or can can affect consumer credit. So we'll be doing a heck of a lot more of that.

And we are providing support to capital markets, which is why I'm here, working closely with various constituents, whether that's with issuers, investors, rating agencies, and providing them information and tools that will help them in either market adoption or understanding the opportunities that are available to them. And using VantageScore. We're also working on putting out more digital tools, putting them out in the public domain, it doesn't help anyone if we're holding them in house, if you will.

Recently, we released a tool called Inclusion 360, which I find phenomenal, whereby you can see credit scores across the country and also look at the left have VantageScore versus traditional scores. And also you can identify underserved populations on an MSA level, our on a puma level. So that's really fantastic. And we are looking to provide more digital tools. And also, I have to end with transparency, transparency, transparency, and that's something that is near and dear to my heart.

As a former Risk Manager, and buyside analyst and portfolio manager, our goal is to continue to develop the most predictive and the most inclusive models without compromising integrity, and to be transparent about what we're doing.

Brendan Le Grange 26:38

Thank you very much. I think it is a fine mission. I think what's also interesting, though, when you talk about transparency, you know, when I started in the industry that meant to the banks, and now to see how much as to the consumers. And I was actually just pulled it up, as we're talking now 4.8 billion scores provided by consumer websites, versus 3.7 billion scores used by credit card issuers.

So actually, in terms of who's using the score, consumers are seeing these scores even more than credit card issuers these days. And yeah, in terms of that transparency message, I think, a key one there that this goes all the way through now to a consumer that the data is about, as we said, you know, from acquisition all the way through to capital markets are really embedded in all aspects of the credit lifecycle. So thank you very much for your time, Toni, it's been a pleasure chatting to you.

Toni Hubbs 27:25

Thank you for having me today.

Brendan Le Grange 27:26

It was a pleasure. And thank you all for listening. If you enjoyed that, please do rate and review on your preferred podcast platform and share widely including on LinkedIn. And while you're there, send me a connection request. The show is written and recorded by myself Brendan le Grange in Brighton, England and edited with assistance by Kane Hunter, show music is by Iam_Wake and you can find full written transcripts, show notes and more content at www.HowtoLendMoneytoStrangers.show

And I'll see you again next Thursday.