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Residential Department: Backspace: January 2019

 

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A showdown looms over homebuyer credit scores

White leather couches and orange cubes serving as side tables decked out the VantageScore Networking Lounge at the Mortgage Bankers Association national conference last fall in Washington, D.C.

The consumer credit-scoring company has been a sponsor at the conference for several years, which might seem odd in that VantageScore is only marginally involved in the mortgage industry.

That could soon change.

For years, Fannie Mae and Freddie Mac have used FICO credit scores exclusively in underwriting to determine the creditworthiness of potential borrowers.

But Congress mandated that the government-sponsored enterprises (GSEs) consider alternative-scoring models as part of a Dodd-Frank Act reform measure that was signed into law in May 2018.

That opens the door for companies such as VantageScore to potentially expand their presence in the mortgage industry significantly.

“Since our inception, we’ve been trying to unlock what we call the FICO monopoly,” says Jeff Richardson, VantageScore’s head of marketing and communication. “We’re probably as close as we’ve ever been.”

FICO, founded in 1956 as Fair, Isaac and Company, is a data-analytics company based in San Jose, California, that measures consumer credit risk for financial products such as credit cards and personal loans.

In the mid-1990s, Fannie Mae and Freddie Mac automated mortgage underwriting and incorporated FICO scores into that process as a measure of potential homebuyers’ creditworthiness. The GSEs have stayed with FICO ever since, and mortgage lenders have followed suit.

VantageScore, based in Stamford, Connecticut, was launched in 2006 and is jointly owned by the three credit bureaus: Experian, Equifax and TransUnion. One of the first phone calls that VantageScore’s CEO made was to Fannie Mae to try to get into the mortgage business, Richardson says.

In a one-year period that ended June 30, 2018, VantageScore was used 10.5 billion times to determine the creditworthiness of borrowers seeking credit cards, personal loans, student loans and other financing, but virtually no mortgages.

The U.S. housing market is the largest credit market in the world. Being in the mortgage industry lends a sense of legitimacy to a credit-scoring company, says Phil Bracken, VantageScore’s managing director of government and mortgage-industry relations.

“If we do it right in mortgage, there will be more residual spinoff in credit card, auto, student loans and other extensions of credit,” Bracken says.

That’s why the company has pitched to lawmakers the idea of more competition in scoring models for mortgages.

FICO welcomes competition and competes every day with other companies like VantageScore, says Joanne Gaskin, senior director of scores and analytics at FICO. Adding VantageScore to the mix wouldn’t foster competition, however, Gaskin contends.

VantageScore and FICO both generate credit scores on borrowers, but FICO relies on the credit bureaus to distribute its scores to lenders, she explains. Because those bureaus own VantageScore, the companies would have every reason to favor VantageScore over FICO. Gaskin describes that as “a vertical-integration play instead of true competition.”

“If VantageScore was to be selected as an option, FICO would be disadvantaged because the bureaus are responsible for the selling, distribution and pricing of both the FICO score and the VantageScore in the marketplace,” she says.

As you know, if your audience is originators primarily, they’re in a fistfight with each other for the last consumer out there.
–Phil Braken, Managing director, VantageScore 

Gaskin also argues that it would be a costly expense for mortgage lenders to change their existing underwriting software to accept new scoring models so entirely different from FICO. The mortgage market also is unique in that lenders make the deal, but the credit risk is often transferred to the GSEs, she says.

Bracken argues, however, that VantageScore’s model brings value to the mortgage industry. For instance, the model focuses on trends and not just moments in time. As Bracken describes it, someone at a 700-point score that is trending upward has a different risk than someone at 700 score trending downward. (Both credit-scoring companies have models with ranges between 300 to 850 points.)

VantageScore also would score as many as 40 million more potential borrowers than the current FICO model. Of those, VantageScore believes 30 million could have scores high enough to obtain a mortgage. Many of these people — who are called the unscored in industry lingo — are people of color who may have limited or no credit history currently.

“As you know, if your audience is originators primarily, they’re in a fistfight with each other for the last consumer out there,” Bracken says. “Let’s go find 30 million of them out there who are capable, responsible consumers.”

What VantageScore sees as a strength, FICO sees as a liability.

FICO requires minimal standards that include credit usage for at least six months before scoring a potential borrower. VantageScore measures the credit risk of people who have a line of credit opened for just one month, Gaskin says. FICO needs to see a pattern to make a predictive analysis, she adds.

“We [FICO] suggest when we build a score that you need a sufficient amount of information about a borrower before building a meaningful score, meaningful for them and meaningful for the lender,” Gaskin says.

The Federal Housing Finance Agency (FHFA), which oversees the GSEs, has been looking at updating the credit-score models used by Fannie Mae and Freddie Mac and also has been evaluating newer models offered by both VantageScore and FICO.

After passage of the Dodd-Frank reform bill last year, FHFA switched gears to define the standards and criteria the GSEs will use to validate credit-scoring models. That will include developing a proposed rule and seeking industry comment.

Other credit-scoring models could meet that criteria. For instance, Equifax, Experian and TransUnion not only own VantageScore, but all three have their own credit-scoring models. So, the GSEs potentially could choose a newer version of FICO, a version of VantageScore, or both — or other credit-scoring models.

“The game’s over. They will be accepting alternative models,” VantageScore’s Bracken says. “Look, we’re not preaching for a substitute monopoly. We don’t want to swap out FICO and swap in VantageScore. We’re for open competition. Whatever comes will come and, if we can’t earn our way, shame on us.”


 

Jim Davis is editor of Scotsman Guide Residential Edition. Reach him at (800) 297-6030 or jimd@scotsmanguide.com.

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