FICO’s Lock on Mortgage Credit Scores Comes Under Fire
Congress moves to inject competition into scores used for many mortgages
The Wall Street Journal
AnnaMaria Andriotis and Lalita Clozel
14 March 2018
Congress wants to accelerate a shake-up of one firm’s dominance over the credit scores used to vet many U.S. mortgages.
Lawmakers last week proposed adding a provision to a bank-deregulation bill that would require mortgage-finance giants Fannie Mae and Freddie Mac to consider credit scores beyond Fair Isaac Corp.’s FICO score for determining a mortgage applicant’s creditworthiness. Fannie and Freddie backed nearly half of all U.S. mortgage dollars originated in 2017, according to Inside Mortgage Finance.
The measure, should it become law, would be a big win for VantageScore, a credit-score system by VantageScore Solutions LLC, owned by three large credit-reporting firms: Equifax Inc., TransUnion and Experian PLC.
VantageScore is already used in certain loan sectors and is FICO’s biggest competitor. FICO remains the dominant score for U.S. consumer lending. It also has a big hold on mortgage-related business because its score is the only one lenders can use for mortgages they plan to sell to Fannie and Freddie.
The matter is already under review by the Federal Housing Finance Agency, which regulates the two mortgage-finance firms. In December, it asked for public feedback on whether to revamp credit-score rules, including allowing competition. Some backers of the legislative provision think the agency has taken too long to act.
The FHFA declined to comment. Its director, Mel Watt, told real-estate brokers in August that the credit-score review was “among the most difficult evaluations undertaken during my tenure” because of the broad impact it could have on the mortgage industry.
A Republican aide briefed on the issue said some lawmakers also were worried the agency might decide against allowing mortgage lenders to use an alternative to the FICO score.
VantageScore has long argued its score could help approve more mortgage applicants, in part because it can assign a score to consumers who haven’t used credit in more than six months. FICO counters that VantageScore’s approach, which seeks to give credit scores to people with stale or thin credit files, would lead to less predictive scores and riskier loans.
“The current system is completely reliant on outdated FICO scoring models and that isn’t serving consumers or lenders well,” said Barrett Burns, president and CEO of VantageScore Solutions. “This is a productive step towards a more inclusive housing-finance system.”
FICO said the provision would help the credit-reporting firms gain more power in the mortgage market. “Allowing the credit bureaus to offer a score they own in a system where they are the single point of sale and distribution for both credit reports and scores would not increase competition; it would consolidate their power,” said Joanne Gaskin, a senior director at FICO. She added the measure also would interfere with and delay the FHFA’s credit-score review.
Liberal Democrats said the provision is an untimely gift to the credit-reporting firms and Congress should leave the decision to regulators. “Determining creditworthiness, balancing access to credit with the need to make sure we don’t end up with millions of foreclosures, is a complicated thing,” said Sen. Sherrod Brown (D., Ohio), who opposes the provision and the overall banking bill. “That’s why we have FHFA; that’s why we have a process in place.”
Sens. Tim Scott (R., S.C.) and Mark Warner (D., Va.) have championed the change in the Senate, which this week is poised to approve the broader bill easing postcrisis banking rules. The overall package has bipartisan support and is expected to clear Congress and become law.
Some lawmakers decided to act on the issue after seeing what they believed were signs the FHFA might not open credit scoring up to competition, the Republican aide said. The credit-score measure would direct the outcome of the FHFA’s request for information, which began in December, requiring the agency to consider competitors to FICO. “We are now trying to enact a law that dictates what path” the agency takes, the GOP aide added.
At a congressional hearing last October, Mr. Watt expressed skepticism that alternative scoring models would result in a significant pickup in lending to people with limited credit histories. “The notion that there would be substantially more people credit scored and that would increase access if we had competition is probably exaggerated,” he said.
A focus of the FHFA’s review is an analysis of VantageScore’s claims that it can help more people get mortgages than the FICO method.
The congressional provision wouldn’t require Fannie and Freddie to approve credit-score competition on the grounds that alternative methods can help more people gain access to mortgages. Instead, it sets out a checklist requiring VantageScore and other competitors to meet certain criteria, including a historical record of predicting default rates and satisfying minimum requirements of “integrity, reliability and accuracy” as defined by Fannie and Freddie.