SAS, the Cary, NC-based analytics company, has developed a sophisticated replacement for credit scoring which promises greater accuracy, process transparency, and a single number from 1 to 432 which will describe a borrower’s financial position. The score can be tied to a mortgage and remain with it through securitization, providing a quick, in-depth way to evaluate a portfolio by summing up the scores.
Clark Abrahams, a financial architect at SAS, describes the systems, called Comprehensive Credit Assessment Framework (CCAF) as a hybrid that includes some judgment plus a number of financial measures that can improve lending from initial underwriting to distribution through securitization.
It begins with the five C’s of credit – character, capacity, capital, collateral, conditions and secondary factors such as reserves or a smaller than usual total housing expense. (Character can include payment history, employability, education, honorable discharge from armed forces, and professional credentials). “It is a framework, but we don’t look at things in isolation; we look at them altogether. With this you can work with information you never would have seen before.”
One of the key differences from credit scores is that CCAF incorporates a borrower’s capital or savings. Credit advisors often encourage consumers to build a credit history through using a credit card or taking out a car loan, which may penalize buyers who use cash. Whether borrowing to build a credit history is useful behavior remains a bit of a mystery since the credit scoring agencies won’t explain their rating process in detail. Abrahams says his score varies by more than 100 points among the three agencies and he was actually penalized for moving to North Carolina and taking a better job at SAS with a higher salary than he had before, since credit scoring reduces the rating for people who have changed jobs and homes recently.
CCAF can providing a score for a mortgage application with a poor credit history, 9 percent down, and little savings and assign a specific number in its 1-432 range. It doesn’t rely solely on payment performance, which can be perfectly fine until it stops cold after a borrower loses a job and has no savings to rely on.
“A score of 113 means a fair credit history, low capacity, a moderate amount of capital, a strong interest in the property from the down payment, and no vulnerability to conditions because it is a 30-year fixed mortgage and the value of the property hasn’t changed in five years.”
He expects investors will divide prefer diversified mortgage pools that are segmented into quintiles or quartiles for optimal risk/return profiles. Because the score remains with the mortgage, investors can see an aggregate measure of risk or drill down into specific mortgages in the pool. With the current regime of mortgage backed securities, said Abrahams, there is a disconnection between borrowers, lenders and investors. The CCAF for each investor can be updated and the refreshed information travels with the mortgage documentation in the securitization pool.
“If you are investing, wouldn’t you like to know that in a AAA portfolio 40 percent of the securities are people who have a holistic classification which shows their capital is low and their capacity is low, that they are surviving paycheck to paycheck, have no months of reserves and are on the edge? But right now they are current, so Fair Isaac says they are fine.”
On a macro scale, this type of rating would allow the Federal Reserve or the Treasury to look at all the loans in a bank or the mortgages across the entire country to determine what financial shape the country is in, he added.
“You can examine the data by bank, channel, or branch and see high-price lending by institution, county or state.”
Abrahams has talked with anyone who will listen about the CCAF, has written o0ne book and is completing a second, and has testified before Congressional committees several times but is frustrated that the existing system of credit scores and ratings is so entrenched. He said some more sophisticated credit measure, like CCAF, which be needed to revive the mortgage back securities market.
“I don’t know how to recapture that market without coming up with something dramatically new like this,” he said. “When you are burned as an Investor, you have a long memory, and you need to get the market comfortable. Once this tool is understood, it will inspire trust and confidence, and this model becomes more predictive over time.”

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