The Federal Housing Finance Agency recently released a Request for Input seeking feedback about the possibility of changing the credit scores the GSEs requires lenders to use to evaluate borrowers. According to the FHFA’s press release, “The Enterprises currently use Classic FICO for product eligibility, loan pricing, and financial disclosure purposes.” The Request for Input seeks public comment on the possibility of allowing the GSEs to also let lenders use FICO 9 (an updated version of FICO’s original scoring algorithm) or VantageScore 3.0 (a rival model developed by credit reporting agencies Equifax, Experian, and TransUnion).
Those critical of the GSEs’ current requirements claim that they bar millions of Americans from home ownership. According to a 2015 Consumer Financial Protection Bureau study, 26 million Americans do not have any credit record, and another 19 million have credit records considered unscorable due to insufficient credit history or a lack of recent credit history.
DS News spoke with Joanne Gaskin, Senior Director, Scores and Analytics at FICO, about FICO’s methods, VantageScore, and what opening up the Enterprises’ credit standards would mean for mortgage and housing.
Speaking of the GSEs’ exclusive use of FICO scores, VantageScore released a public statement that said, "Monopolies never benefit markets or consumers and they create the opportunity for pricing power unchecked by competition." Could you talk about why you don’t think that is a fair characterization of the situation?
Absolutely. The first thing that's important to note is that FICO is not responsible for the sale, distribution, or pricing of the FICO scores. We use our distribution partners, which are Equifax, TransUnion, and Experian. So we do not exert pricing power, as we don't have the ability to price directly in the marketplace. So keep in mind where the pricing power resides is with the bureaus who own VantageScore.
That it's exacerbated in the mortgage market, when you have a tri-merge requirement, meaning that each and every one of the credit bureau files are required for mortgage origination, if you're delivering to Fannie Mae and Freddie Mac. They have unchecked pricing power associated with both the credit report and credit scores. So we would say that the credit bureaus actually have a data monopoly. Fannie Mae and Freddie Mac owe no duty to FICO, we could be replaced at any time. But there's not an opportunity to replace the data.
Considering the proposed changes to change the GSEs’ credit reporting standards, do you think that there's anything particularly unfair about those proposed changes, or is there a way that you can see to change those credit score requirements in an equitable way?
FICO absolutely welcomes competition as you noted, but take a look at what the choices are. It's one independent company and one company owned by the three credit bureaus. We would suggest that a fair competition is competition among other independent analytic firms. Because really, having a score that's owned by the three bureaus isn't adding to competition. Actually, it's consolidating, or minimizing competition.
Think for a moment, what might be the likelihood of another independent analytic firm gaining access to the credit bureau data to compete with VantageScore? I would suggest that FICO continues to exist as an independent firm because we're trusted, and requested by the lenders.
Has there been, as far as you know, any move to even consider doing something like that? Obviously they're talking about opening and changing the credit score requirements, but has there been any discussion about actually bringing other independent organizations in, or has it just mainly been between FICO and VantageScore?
The RFI itself just considers FICO and VantageScore as the two broad-based scores that have scores in each of the three repositories. What we're hearing from folks is that the potential answer to creating more competition might reside in the question that was asked about the requirements for the tri-merge report.
So, lenders are opining about the need to continue to purchase a tri-merge, as the data across the bureaus has become more similar. Years and years ago they were more regional in nature, and they've all moved to very broad, national scales. FICO doesn't have a true opinion on this. We don't have the data to say that the data looks the same across, but I think if you spoke to lenders that they might give you a perspective on that.
Assuming that the GSEs did go forward and they allowed lenders to start using VantageScore 3.0, what do you think would be the impact on the housing and mortgage industries?
We believe that there is a risk to the system because of their lack of minimum scoring criterion. The score will not have the same predictive strength as what we see for traditional FICO score. We likely would project poor performance on that population. We also think that there's a risk to the system, which Director Wyatt has suggested, that if there are two scoring vendors in the marketplace allowing for choice among them, that there is this risk for what he refers to as "a race for the bottom." The question is whether or not we will reward the most predicative score or the score that will qualify the most borrowers.
We maintain our minimum scoring criterion, because it's time-tested over the last 27 years, lenders trust us, and we're used in 90 percent of lending decisions.
What do you think are the biggest challenges of your job, and what do you wish more people understood about your job and about how FICO operates?
That's a great question. We would be thrilled if everyone understood one thing. That weaker credit scores do not expand access to credit. In fact, if a weaker score is adopted, it creates uncertainty. Uncertainty in the marketplace always leads to further credit tightening, and increased cost to the system. So, we say a weaker criterion negatively impacts consumers.