A change in how potential mortgage borrowers are assessed may be on the horizon. Soon, FICO may not be the only game in town. The Federal Housing Finance Agency (FHFA) — the federal body that stands behind the guarantors of most American mortgages, Fannie Mae and Freddie Mac — is considering opening up the market for credit assessment. Presently both Fannie and Freddie require the FICO score and use it and it alone as the algorithmically determined ranking of borrower worthiness.
That effective monopoly has been in place for over two decades — and critics (particularly during the last decade or so) have complained that FICO is too limiting a system that is locking out too many buyers; at present, around 45 million Americans have no FICO score at all, according to a 2015 study by the CFPB.
FICO determines a consumer's credit score by evaluating a series of criteria to determine likeliness to repay and ranking them with a score from 350-800. It is the dominant system in use for credit ratings — mortgage underwriters use it nearly exclusively, but it is popular with credit card issuers, banks and car loan underwriters as well, and is used in the vast majority of the credit decisions in the U.S.
But, in recent years, the three credit rating agencies — Experian, Equifax and TransUnion — have developed the alternative Vantage score system, which uses the same scoring range but slightly different criteria. Vantage score proponents note that the system is more inclusive than FICO — and that customers aren't well served by having their FICO score used as the sole criteria for determining their credit worthiness.
Vantage does not have nearly the penetration FICO does — but it has made notable inroads, particularly among credit card issuers, in recent memory. And now, the firm is determined to seize on the FHFA's call for alternatives to the FICO.
“Monopolies never benefit markets or consumers and they create the opportunity for pricing power unchecked by competition,” Vantage noted in a public statement, according to The Financial Times.
But FICO rather likes its position in the marketplace and has shot back, noting that among the benefits it offers is independence, as it does not gather and collate the underlying financial data on consumers.
“FICO welcomes competition — we just want to have fair competition,” said Joanne Gaskin, senior director at the company.
She noted that FICO's model has seen massive revisions in its latest iteration, which is newer than an older model that is currently required by Fannie and Freddie. She also noted there is no reason to believe that simply swapping to a Vantage Score standard wouldn't necessarily open markets up to more borrowers - or just create a lot more low scores to evaluate.
“Our competitor is claiming millions [of borrowers] would get through the door” if it were used, she added. “All of our data would suggest absolutely the otherwise.”
What the FHFA will actually do remains up in the air. They could allow lenders to use both scores, or allow them to chose between which model to use.
There are also those who question whether adding choice to the system will actually add value, as more scoring methods can translate into additional costs for the lenders who have to evaluate credit.
Charles Gabriel, of the policy analysis group Capital Alpha, told the FT that alternative methods “will still be based on the same repayment-history data that Experian, Equifax and TransUnion already provide.”
The FHFA will be taking public comment till February.