Facing criticism of its pricing and imminent competition from a rival, FICO score provider Fair Isaac is rolling out a new direct license program it claims will save mortgage lenders up to 50 percent by eliminating credit bureau markups.
Mortgage lending industry groups issued lukewarm praise, calling the move a step in the right direction.
But the big three credit bureaus — who are working with Fannie Mae and Freddie Mac’s federal regulator to expand adoption of VantageScore 4.0, a rival to the FICO score — dismissed Fair Isaac’s new program as “another price increase.”
Under the direct license program with resellers of “tri-merge” credit reports, Fair Isaac will charge $4.95 per score — 50 percent less than the current system, in which tri-merge resellers purchase scores through the big three credit bureaus, Experian, Equifax and TransUnion.
The credit bureaus maintain files on consumers that track their debts and repayment histories, and that information is fed into credit score algorithms like FICO and VantageScore to generate credit scores.
Fair Isaac will charge an additional fee of $33 — per borrower, per score — if a borrower closes a loan, “recognizing the FICO Score’s downstream utility for mortgage insurers, [Fannie Mae and Freddie Mac], investors, rating agencies, and other market participants.”
So getting FICO scores to check rates with one lender would cost $14.85 ($4.95 per credit bureau), while closing a loan would generate close to $114 in fees.
Lenders can opt out of the “performance model” and pay $10 per score, regardless of whether the borrower ultimately takes out a loan. That’s the average price previously charged by credit bureaus, Fair Isaac said, and represents “no increase in per score fees for lenders.”
Will Lansing
“Today marks a turning point in how credit scores are delivered and priced across the mortgage industry,” Fair Isaac CEO Will Lansing said in a statement. “Direct licensing of the FICO Score brings transparency, competition, and cost-efficiency to the mortgage lending process. This change eliminates unnecessary mark-ups on the FICO Score and puts pricing model choice in the hands of those who use FICO Scores to drive mortgage decisions.”
Fair Isaac said it “is currently working with mortgage tri-merge resellers to implement the new direct license program,” and will offer the same terms to Experian, Equifax and TransUnion — although it “does not control any pricing mark-ups the bureaus may impose in their channels.”
A trade group representing the credit bureaus, the Consumer Data Industry Association (CDIA), said Fair Isaac’s positioning of the direct license program as a cost-cutting measure “is simply not true.”
“With this announcement, FICO has at least doubled its publicly disclosed prices year-over-year while introducing operational costs and risks to resellers and lenders,” the CDIA said in a statement Thursday. “FICO’s pricing proposal will also inevitably cause lenders to pass on significantly higher costs to consumers, especially those that are successful in securing a mortgage.”
Lending industry groups and the head of Fannie and Freddie’s federal regulator welcomed the new pricing models as a useful first step, but said more reforms are needed.
Bob Broeksmit
Fair Isaac’s direct license program “enhances transparency and provides more options to lenders,” but it “remains to be seen if this will result in materially lower costs,” Mortgage Bankers Association President and CEO Bob Broeksmit said, in a statement.
The MBA would like to see Fannie and Freddie drop tri-merge reporting altogether, saying requiring lenders to pull credit reports from all three credit bureaus is a costly, outdated relic that provides “scant tangible benefits.”
Fannie and Freddie’s regulator, the Federal Housing Finance Agency, had been working for several years on a plan to move from tri-merge to bi-merge credit reporting, which would allow lenders to pull credit scores from two credit bureaus instead of three.
The plan, which had been scheduled for implementation this year, would also have retired Fair Isaac’s Classic FICO scoring algorithm — the only score authorized by Fannie and Freddie — and required lenders to start using two new scores.
Their backers say the new scoring algorithms — Fair Isaac’s FICO Score 10 T and VantageScore 4.0, developed by the credit bureaus to compete with FICO — are more inclusive, considering trended credit data and additional inputs such as rent, utility, and telecom payments to help more people qualify for loans.
The FHFA had planned to require lenders who work with Fannie and Fredie to start using both of the new credit scoring algorithms to evaluate borrowers by Oct. 1, but suspended that timeline in January.
Lenders still need access to historical FICO Score 10 T data that will help them fine-tune their underwriting processes when using the new algorithm, the FHFA has said.
FHFA Director Bill Pulte took lenders by surprise in July when he announced on the social media platform X that Fannie and Freddie would allow lenders to use either FICO Classic or VantageScore 4.0 “effective today.”
Pulte has said he was “not happy” about price increases levied by Fair Isaac in the past, which an industry trade group, Community Home Lenders of America, claims total 700 percent over the past three years.
But lenders, Fannie Mae and Freddie Mac, and investors who buy mortgage-backed securities (MBS) that fund most home loans couldn’t just flip a switch and implement Pulte’s directive that the mortgage giants start accepting loans scored by VantageScore 4.0.
While the various industry stakeholders continue to update their systems and policies, Fannie and Freddie continue to require that lenders use FICO Classic to score loans. Mortgage lenders are using FICO Score 10 T and VantageScore 4.0 to score loans they don’t intend to sell to Fannie and Freddie.
Like the MBA, Pulte characterized Fair Isaac’s new pricing model as a “first step,” saying he’s had “productive conversations” with Lansing and other Fair Isaac executives.
Bill Pulte | Credit: X
“I GENUINELY appreciate FICO taking constructive criticism, which was given in the spirit of ensuring a competitive and safe and sound market, to then generate creative solutions to help the American consumer,” Pulte posted on X Thursday.
“I encourage the credit bureaus to also take similar creative and constructive actions to make our markets safer, stronger, and more competitive,” Pulte said. “To that end, VantageScore should also look at ensuring they are competitive, in every way, including but not limited to costs.”
The Community Home Lenders of America (CHLA), which represents small and mid-sized community-based mortgage lenders, said in a statement provided to Inman that Fair Isaac’s direct license pricing “appears to be a good first step in addressing our longstanding criticisms about FICO’s monopolistic pricing and practices.”
But CHLA is also concerned that, “in a head-to- head matchup, Fair Isaac might ultimately squeeze out VantageScore and the credit bureau model altogether.”
The CHLA wants Fannie and Freddie to study the feasibility of setting up their own credit scoring subsidiaries, which, “if successful, could be spun into the marketplaces, earning taxpayers even more returns on their investment.”
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