It’s not quite Coke vs. Pepsi or Bud Light vs. Miller Lite level yet, but the rivalry between credit scoring companies FICO and VantageScore has been ratcheted up several notches in recent weeks.

It started when Bill Pulte, who heads the Federal Housing Finance Agency (FHFA), announced on July 8 that mortgage giants Fannie Mae and Freddie Mac would allow lenders to use the VantageScore 4.0 model for mortgage credit checks in addition to the already approved Classic FICO model.

Classic FICO, a creation of the company whose legal name is Fair Issac Corp., was adopted by Fannie and Freddie in 2020 as the standard credit-scoring model for loans eligible for purchase by the government-sponsored enterprises (GSEs). VantageScore is an independent company jointly owned by the three major credit bureaus — Experian, Equifax and TransUnion. It rolled out its 4.0 model in 2017.

Pulte, who made the VantageScore announcement on the social media platform X, said the move was designed to “increase competition to the credit score ecosystem.” He also claimed that the VantageScore model, which incorporates rent payment data when it is available in a consumer’s credit file, would expand credit access to “millions of forgotten Americans.”

The response to the FHFA director’s social media declaration was swift and divided, in part because few details were initially shared on how the implementation would take effect.

Shannon McGahn, who serves as executive vice president and chief advocacy officer of the National Association of Realtors, characterized the expansion of credit scoring models for mortgage underwriting as a “major step toward a more accurate and equitable mortgage underwriting process.”

The Mortgage Bankers Association, American Bankers Association, Housing Policy Council and Structured Finance Association released a joint statement cautioning that while Pulte’s announcement was a “promising first step to our shared goal of a more efficient, more transparent and more competitive credit scoring system,” there remain “a number of implementation questions and concerns that the GSEs will need to address before they can take delivery of loans that rely on new scores.”

The Wall Street Journal’s editorial board, in an opinion piece titled “How to Increase Mortgage Defaults,” warned that “the big risk is that mortgage lenders will rely on VantageScore’s ratings to qualify marginal borrowers and make riskier loans.”

FICO CEO Will Lansing seized upon the Journal piece with a letter to the editors that maintained “VantageScore’s model is more ‘inclusive’ because it asks for less. It has given scores to people with limited credit history, in some cases, as little as one month.”

“The use of a score with less rigorous credit criteria than FICO’s would put the safety and soundness of the $12 trillion U.S. mortgage market at risk,” Lansing wrote.

Competing studies

Eric Kaplan, a senior adviser with the Milken Institute, wrote in an email to Scotsman Guide that the mortgage industry should tread cautiously when incorporating alternative credit scoring models.

“Just because a new score says people are creditworthy doesn’t make it so. That’s where the deep data work comes into play, as it must, to evaluate and validate any statistical model,” Kaplan wrote. “No score or scoring model should become part of the ecosystem until the market is comfortable with it from accuracy, risk, pricing, soundness, regulatory, legal, operational and disclosure perspectives, among other things.”

This week, FICO and VantageScore released studies that offered competing evidence of the performance of the companies’ credit scoring models in predicting mortgage defaults.

FICO released a white paper Wednesday, stating its data scientists found “FICO Score 10 T significantly outperforms VantageScore 4.0 in mortgage origination predictive power.” It also cited an independent third-party study conducted by the Urban Institute, which found that FICO 10 T is five times better than VantageScore 4.0 at detecting loan losses when compared to Classic FICO.

It should be noted that FICO 10 T is a newer scoring model introduced by the company in 2020. While the FHFA validated it and approved it for use by Fannie Mae and Freddie Mac in 2022, it hasn’t been rolled out yet and is “planned for future use” by the GSEs, according to a Q&A released by the FHFA this week.

VantageScore responded to the FICO white paper on Thursday with an analysis that claimed VantageScore 4.0 “demonstrates substantially superior performance over the incumbent monopoly Classic FICO model,” while noting it did not compare its model to FICO 10 T due to insufficient data released publicly by FICO.

According to VantageScore’s analysis, its 4.0 model captures 11.2% more mortgage defaults than Classic FICO within the highest risk-scored population in a 10-year data set spanning 2013 to 2023. By using machine-learning techniques and including rent, utilities and telecom data in credit files, VantageScore claims the 4.0 model “unlocks an estimated 5 million creditworthy borrowers for the mortgage market.”

‘Independent umpires’

The Community Home Lenders of America (CHLA), a nonprofit association representing small and midsized independent mortgage banks, sent a letter to Pulte on Wednesday commending his decision to add VantageScore 4.0 to the credit scoring mix.

But the CHLA went a step further, suggesting that having four credit score companies would be better than two.

“CHLA does still recommend the GSEs be directed to use their massive data and analytics to each establish their own business subsidiaries to evaluate the creditworthiness of borrowers,” the letter proposed. “Such companies, once established and proven to be reliable, could then be sold off by each GSE into the open market to ensure these de novo companies serve as independent umpires that also provide more competition generally.”

The CHLA also criticized what it called a “monopoly marketplace,” in which FICO “sets the credit-pull price based on whatever number appeals to them.” The group then speculated that “industry chatter expects Fair Isaac to raise prices again this fall, which would be the 4th year in a row of major hikes.”

“We believe that Fair Isaac has already decided to execute these price hikes, in part because Fair Isaac expects — for technical reasons — that VantageScore will need much more time to begin to get traction,” CHLA stated.

A FICO spokesperson wrote in an email to Scotsman Guide that no decisions have been made on pricing.