Fintech Takes Fintech Takes: Credit Scores, Cash Flow, and the Coming Trust Collapse
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Jun 25, 2025 Martin Kleinbard, an advisor at Granular and former CFPB official, shares his expertise on the pitfalls of traditional credit scoring. He traces the origins of FICO scores and discusses how well-intentioned legislation led to over-standardization and systemic risks in lending. The conversation highlights the inadequacies of relying solely on credit scores, especially in the digital age. As AI changes the landscape, Kleinbard warns of a looming trust collapse in credit assessments, advocating for cash flow data as a more reliable alternative.
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Origins of FICO Score
- The FICO score was created to provide an objective, generalizable credit score that could be used nationwide.
- It became a proxy for trust in lending, allowing comparison of borrowers across different regions.
FICO Overshadowed Traditional Metrics
- The FICO score became the primary factor in lending decisions, overshadowing traditional metrics like collateral and cash flow.
- This shifted lenders' focus almost entirely to willingness to repay, causing other important ability-to-repay factors to be neglected.
Limits of Credit Scores Exposed
- Overreliance on FICO scores contributed to hidden risks, such as borrowers' inability to afford payment increases on adjustable-rate mortgages.
- The score lacked visibility into ability-to-pay disruptions, leading to widespread defaults in the 2007 financial crisis.
