Are credit bureaus, housing groups in cahoots to kill FICO scores?

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Efforts to persuade regulators to allow Fannie Mae and Freddie Mac to use alternative credit scores would stifle competition between the credit bureaus and FICO and do little to expand access to credit, according to industry analyst Chris Whalen.

A bipartisan bill introduced in the Senate with broad housing industry support last month would require the Federal Housing Finance Agency to direct the government-sponsored enterprises to accept new credit scoring models, like the VantageScore model created by Equifax, Experian and TransUnion. FHFA Director Mel Watt said the GSEs will not adopt the new scores until 2019 at the earliest, saying other issues must be resolved first.

"FHFA Chief Mel Watt is nobody's fool and in particular understands the state of pay-to-play in Washington," Whalen, the chairman of Whalen Global Advisors, wrote in a post on his Institutional Risk Analyst blog. "The push for new credit scores is not really about competition or access to credit for low income households, but rather the corporate ambitions of the major consumer credit bureaus."

Whalen goes so far as to suggest housing groups and the credit bureaus are in cahoots to supplant FICO scores and make VantageScore the industry standard.

"By spending money on marketing and Washington lobbying activities, the three credit depositories have orchestrated a seeming groundswell of support for the VantageScore," Whalen writes. "But to us, the combination of the three data monopolies in the world of housing finance sure looks like anti-competitive behavior."

"[T]his situation with the three incumbent consumer credit depositories looks like an illegal attempt to stifle competition — namely FICO — and create a vertical monopoly atop the existing horizontal data franchise shared by the three firms," he adds.

In a statement, VantageScore Solutions called Whalen's piece "misguided."

"Putting aside that it's impossible for a group of competitors to 'share a monopoly' as the author contends, the column is misguided on all levels," spokesman Jeff Richardson said in a statement.

"The efforts behind pushing for lenders to choose which credit scoring model is the best fit for their businesses is about fairness and doing what's right for consumers," Richardson said. "The status quo, where grossly outdated versions of FICO are mandated for use penalizes those that would be scorable or would have higher scores when more modern models are used. This is unfair and cannot continue."

Whalen cites the recent Equifax data breach as a risk of market concentration among credit data providers.

"Yet as we've learned recently with Equifax, the depositories take no responsibility for protecting consumer data or even telling consumers when they have been compromised," he writes. "Nor do the depositories take any responsibility for the accuracy of data gathered or how it is used, as with identity theft and credit fraud."

To be sure, Whalen acknowledges the GSEs credit scoring policies are long overdue for an upgrade. However, he adds that requiring Fannie and Freddie to replace FICO with VantageScore or allowing both types of credit scores would be complicated.

"There is not enough of a significant positive difference between the two models to make a change worth the time and money," Whalen said. "We also think the idea of the lender selecting the credit score to be used in the underwriting process is a non-starter with investors — and prudential regulators. Real simple: the answer is no."

And any changes to the GSEs credit scoring practices must ensure that mortgage bond investors can still reliably measure and assess investment risks,

"[W]e'd like to see a public, head-to-head comparison of the different scores supervised by the GSEs and their respective regulators, and with input from the credit community," Whalen said. "The last word on this topic is not going to come from Mel Watt or anybody in Washington, but from the bond investors who hold $9 trillion in RMBS."

An update to the credit scoring models is inevitable, said VantageScore's Richardson.

"Given that newer models from both FICO and VantageScore are readily available and used in all other categories of the consumer credit industry, some conversion is in the future for the mortgage industry," Richardson said in the statement. "This conversion would require some expense and operational considerations regardless of whether the decision is to upgrade to the newest version of FICO only or to create a lasting platform where competition can flourish and consumers are treated fairly."

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Credit scores Credit quality Housing finance reform GSEs Underwriting Chris Whalen VantageScore Solutions FICO Equifax Experian Transunion