By Jim Davis
A showdown looms over homebuyer credit scores
Jim Davis is editor of Scotsman Guide Residential Edition.
That’s why the company has pitched to lawmakers
the idea of more competition in scoring models for
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.
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
White leather couches and orange cubes erving as side tables decked out the VantageScore Networking Lounge at he 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 communica-
tion. “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, Califor-
nia, 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
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.
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, respon-
What VantageScore sees as a strength, FICO sees as
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.” n
“As you know, if
your audience is
they’re in a fistfight
with each other for
the last consumer
Managing director, VantageScore