FICO’s Adoption and Pricing in the Mortgage Origination Market

For decades, thousands of lenders and other participants, from credit unions and community banks to the nation’s largest lenders and investors, have freely and voluntarily selected the FICO® Score as the independent, predictive, and reliable measure of consumer creditworthiness in the United States.  They have done so because FICO pioneered the development of credit scores and was the first company to provide consumer credit markets with a tool for evaluating borrower credit risk objectively and fairly, without the influence of subjective human judgment or biases.  In turn, the FICO Score transformed those markets in fundamental ways that benefit consumers, lenders and investors, and our success has been hard-earned through continued product innovation and a commitment to safety and soundness, and not as the result of any government action or anticompetitive practices. 

History of the FICO Score’s Adoption

FICO released the first generally available FICO Score to U.S. consumer credit markets in 1989.  The FICO Score soon became widely used by lenders in making credit decisions on mortgages and other types of consumer credit.  In 1991, the FICO Score became available at all three major consumer reporting agencies, Experian, Equifax, and TransUnion (the “CRAs”).  In 1995, Fannie Mae and Freddie Mac—when they were operating as for-profit corporations owned by private shareholders—voluntarily adopted the FICO Score in the conforming mortgage market because it was the score that lenders were already widely using as the industry standard measure to evaluate consumer credit risk when making credit decisions for their own portfolios (inside and outside the mortgage market).  Driven by FICO’s continued innovation and the substantial value provided, the FICO Score has remained the trusted and consistent measure of credit risk in the conforming mortgage market ever since, both in the 13 years before Fannie Mae and Freddie Mac were placed into governmental conservatorship in 2008 and in the 16 years since the conservatorship was established.

Notably, however, the vast majority, approximately 99%, of FICO Scores used for decisioning across the consumer credit industry are used outside mortgage originations.  In fact, even within the mortgage market, lenders originate nearly 30% of all mortgages outside the Fannie Mae and Freddie Mac programs but still choose to use FICO Scores for those mortgages.  In sum, adoption of the FICO Score by Fannie Mae and Freddie Mac in the conforming market, and by thousands of market participants outside that market, is the direct result of the value the FICO Score provides and not the result of any government action or anticompetitive practices.

FICO’s Royalty Rates Have Been Historically Underpriced

Despite the value the FICO Score provides, it is important to note that FICO has neither the access to the necessary credit data nor the means of distribution to provide Scores directly to end users (e.g., lenders).  Instead, FICO licenses its proprietary credit scoring models to the three CRAs. Accordingly, it is ultimately the CRA—not FICO—that sets the price the resellers and end users pay for the FICO Score.

With respect to the royalties FICO charges the CRAs, those royalties have historically been priced substantially below the value derived from our scores by other market participants.  This underpricing situation arose because the wholesale royalties for FICO Scores used in mortgage were originally established in 1989 and remained at those low amounts for decades due to contractual and technical constraints.  As a result, the royalty rates that FICO received from each of the CRAs were essentially flat for nearly 30 years after the FICO Score was introduced in 1989.

In 2012, FICO began the process of re-negotiating its license agreements with each CRA, which took several years.  The agreements FICO and each CRA eventually reached finally gave FICO the right to adjust its base royalty rates for FICO Scores once per year, with advance notice to the CRAs.  As a result, FICO first adjusted its royalty for mortgage in 2018, but unlike in other markets where FICO had adopted a volume-based tiered royalty pricing structure (e.g., auto loans, credit cards and personal loans), certain technical and structural constraints in the mortgage market required FICO to continue to charge a flat royalty in the mortgage market regardless of volume or other factors: approximately 50-60 cents per score for all mortgage lenders starting in 2018.

By September 1, 2022, well before the Federal Housing Finance Agency announced the validation and approval of FICO Score 10 T in the conforming market, FICO notified the CRAs that, consistent with other markets, it was adopting a tier-based royalty structure for mortgage, generally based on the volume of FICO Scores delivered to lenders.  Under that tiered structure, FICO’s royalty for the highest volume tier remained unchanged, and the royalty for lower-volume tiers increased, although that was only the second increase in FICO’s nearly 30-year history of providing credit scores to the mortgage market, apart from customary adjustments to account for inflation over the last few years.

With that change, FICO began collecting in 2023 approximately $0.60 to $2.75 per FICO Score, which equates to approximately $2-$8 total for all three scores out of a $40 to $70 (or more) tri-merge report and score bundle.  Notably, with that change, all amounts for the tri-merge report and score bundle above that $2-$8 were collected and retained by others who sell and distribute the scores.

FICO’s New Mortgage Royalty Structure

After announcing our adoption of the tier-based royalty structure for 2023, various market participants provided valuable feedback, raising potential concerns and challenges presented by implementing such a structure, and urging FICO to reconsider the tier-based approach.  After careful evaluation of the feedback, we decided to eliminate the tier-based structure.  With our new wholesale pricing structure for 2024, we eliminated the tiering so that the same per-score wholesale price applies for mortgage lenders: approximately $3.50 per FICO Score used in mortgage originations.  All amounts above this FICO Score wholesale price per score, charged as part of a tri-merge score and report bundle, are collected and retained by others.

It is important to note, though, that even after this current adjustment, at $3.50 per FICO Score, the royalty collected by FICO in the mortgage market constitutes only 15% of the cost of a $70 tri-merge credit report, the substantial value of which is derived from the FICO Score itself.  With average closing costs of approximately $6,000 per mortgage[1], FICO’s royalties remain an exceedingly small percentage—approximately two tenths of one percent (or less)—of a consumer’s closing costs and are therefore not an impediment to home ownership.  Additionally, we believe the cost of the FICO Score relative to its value is entirely fair and reasonable particularly when all further downstream uses by industry participants are considered.  Beyond its initial use in originations, the FICO Score is then transmitted and leveraged throughout the mortgage credit ecosystem—from underwriting, mortgage insurance, pricing and delivery, and securitization to rating by credit rating agencies, evaluations by broker/dealer desks, credit risk transfer, servicing, risk management, investor disclosure, and regulatory and capital requirements, in each case at no incremental royalty charged by FICO beyond the per score amount collected for the initial origination use itself.

The confidence, stability and efficiency the FICO Score affords mortgage market participants supports market liquidity, which in turn expands credit availability and lowers overall mortgage costs to households. The FICO Score’s adoption is a testament to the market’s recognition of its tremendous value and the central role it plays across U.S. consumer credit markets.  FICO continues to drive innovation with its newest most predictive FICO Score version, FICO Score 10 T.  Several large mortgage lenders and servicers have recently announced joining FICO’s early adopter program designed to support transition to FICO Score 10 T for use in mortgage outside of the conforming market.