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FICO's Direct Score Distribution: A Double-Edged Sword for the Mortgage Market

FICO's Strategic Shift and Industry Responses

Fair Isaac Corp. (FICO) has initiated a new program allowing its resellers to directly compute and disseminate credit scores to lenders, a departure from the previous system where credit bureaus acted as intermediaries. This change has elicited varied feedback from the mortgage sector. Advocates view it as a significant step towards enhancing market competition, while skeptics caution that it could lead to an immediate increase in credit score expenditures.

Circumventing Traditional Credit Bureaus

The program, launched by FICO, effectively bypasses the three major national credit bureaus—Equifax, TransUnion, and Experian—by empowering credit reporting agencies (CRAs) to distribute scores directly. This strategic maneuver coincides with intensified rivalry with VantageScore, a product of the three bureaus, which is soon to be an alternative to the Classic FICO score for loans acquired by Fannie Mae and Freddie Mac.

Regulatory Perspectives and Call for Competition

Federal Housing Finance Agency (FHFA) Director Bill Pulte has expressed appreciation for FICO's willingness to consider constructive criticism, viewing their decision as an initial positive stride. Pulte has encouraged credit bureaus and VantageScore to adopt similar innovative and constructive measures to bolster market safety, strength, and competitiveness, particularly regarding cost efficiency. VantageScore has chosen not to comment on these developments.

Understanding FICO's New Pricing Models

FICO is presenting lenders with two distinct pricing options. The "performance model" involves a royalty fee of $4.95 per score and an additional $33 per borrower per score for funded loans, a structure that benefits lenders with high loan fallout rates. The conventional model maintains its $10 per score rate through tri-merge resellers, aligning with prior pricing. Lenders retain the option to engage directly with credit bureaus. The industry anticipates that increased participation from various entities will promote pricing accountability.

Financial Implications and Bureau Dependency

Mortgage executives suggest that this shift will divert some revenue from credit bureaus, as resellers become direct clients of FICO. However, concerns have been raised that bureaus, still holding sway over vital credit data like tradeline history, might escalate their fees to compensate for lost income. Historically, FICO charged bureaus $4.95 per score, a cost often doubled before being passed on to resellers. Shelley Leonard, President of Xactus, emphasizes that resellers remain heavily reliant on credit bureaus for precise consumer credit data, a dependency unlikely to change. The bureaus' control over borrower data, requiring substantial scale, makes replication challenging, thus not fully disintermediating their role.

Operational Adjustments and Market Feedback

Presently, credit bureaus process consumer data through their technological integrations with FICO's algorithmic models to generate a consolidated credit file, which resellers then compile into a tri-merge report. Under the new arrangement, while inputs and outputs remain constant, score calculation can be handled by resellers. Resellers are awaiting updated pricing from bureaus for 2026. The Mortgage Bankers Association (MBA) President and CEO Bob Broeksmit acknowledge the program's potential for enhanced transparency and options but questions if it will genuinely lead to lower costs. The Community Home Lenders of America (CHLA) voices apprehension about FICO potentially dominating VantageScore and the credit bureau model, pledging to monitor the program to ensure promised savings are realized and passed to consumers.

Implementation and Industry Impact

FICO is actively collaborating with resellers to implement the new options. Some resellers use their proprietary platforms integrated with FICO, while others rely on third-party vendors. Xactus, for instance, plans to leverage existing bureau integrations for FICO's new system, aiming for readiness by January 1, the program's effective date. Given that 90% of leading U.S. lenders utilize FICO scores, these changes are aligned with calls from policymakers and industry leaders to modernize credit infrastructure, promoting affordability, liquidity, and accessibility within the $12 trillion U.S. mortgage industry.