During the three years since the Federal Housing Finance Agency began formally studying new credit scoring models, dozens of groups representing lenders, investors, consumers, and members of Congress have written in support of competition. While these groups recognize that there is a cost to overcoming convention, they know that credit scores are an important gateway to homeownership and recognize the limitations of granting any one firm a government-sanctioned monopoly on such a critical input. Competition is, after all, the lifeblood of American capitalism.
But every debate needs a devil's advocate. Financial blogger Chris Whalen, with a penchant for contrarianism and an opinion on everything from bitcoins to guerilla military tactics, recently took up that charge.
Whalen casts aspersions on the ability of competitive models to score more creditworthy people, citing in a non sequitur, an unrelated blog post by FICO; claims the most important constituency in the "access to credit" debate is Wall Street; and misleadingly attempts to link the data breach at Equifax to the multi-year conversation about competing credit scoring models. In a series of observations short on facts and heavy on conjecture, he misrepresents almost every element of this discussion.
Whalen also asserts that, in his legal opinion, VantageScore is an "illegal attempt to stifle competition." He apparently overlooks a 2009 ruling in the U.S. Federal District Court, which was later affirmed by the Eighth Circuit Court of Appeals, specifically rejecting that exact notion.
In response to a suit filed by FICO, the district court concluded that:
"…Fair Isaac's antitrust claims suffer from a fundamental, indeed fatal, flaw. The alleged conspiracy does not employ tactics that seek to destroy or cut off competition before it even has a chance to take hold; rather, the alleged conspiracy is dependent on convincing the market…that greater value can be realized by switching from FICO scores to VantageScore credit scores. This is the very essence of competition."
The "groundswell of support" for competing models is a result of that very effort: convincing the market that there is value in a new approach, and asking FHFA to grant market participants the ability to choose. The only "anticompetitive" force at play is FICO's lobbying to maintain the status quo, which Whalen suspiciously overlooks.
VantageScore has never aimed to replace FICO or any other credit scoring model, but rather for the chance to compete on a level playing field. Replacing one mandate with another wouldn't serve the long run interests of this market. Anyone who has seen our presentations, read our regulatory comment letters, or read our public statements would plainly see that this is our position.
Competition in other areas of consumer lending has driven both VantageScore and FICO to build models that are more accurate and more consumer-friendly. Permitting that competition in the mortgage market can increase certainty for lenders and transparency for investors. In a setting where models are routinely validated, tested, and deployed alongside fully-custom underwriting engines, we know that competition cannot weaken standards. For consumers, there is only upside.
FHFA, together with Fannie and Freddie, have taken a measured approach to studying newer models. We applaud that approach, including their decision to solicit public comment. We urge FHFA to announce a decision as soon as possible, followed by the time and information that the market will need to ensure a smooth implementation.