Statement on FHFA’s Interim Lender Choice Policy, announced Tuesday July 15th:

The Federal Housing Finance Agency’s interim “lender choice” policy introduces a dangerous precedent that increases adverse selection risk that will raise prices for consumers.  Further, it inexplicably favors a less predictive credit score that will undermine the safety and soundness of the enterprises and their counterparties, and damage liquidity in the $12 trillion mortgage industry. The GSEs previously conducted a thorough analysis of FICO® Score 10 T and VantageScore 4.0 and found FICO Score 10 T significantly outperforms VantageScore 4.0 in mortgage predictiveness and accuracy (we identified the same thing in our white paper). We join longstanding industry demands that FHFA release that analysis publicly as part of this process in the spirit of transparency and responsible policymaking.

Lender choice sounds consumer-friendly. It is not.

Both FICO® Score 10 T and VantageScore 4.0 include rental, telecom and utility payment data when it is available in a consumer’s credit file. VantageScore’s model is more “inclusive” because it lowers critical and time-tested credit scoring criteria—including by assigning scores to individuals with as little as one month of credit history, sacrificing the rigor and reliability the mortgage industry demands. And unlike VantageScore 4.0, which considers specific factors like whether a prospective borrower currently owns or ever owned a home and therefore penalizes first-time home buyers that don’t, FICO Score 10 T does not and therefore does not penalize individuals who have never owned a home.

Lender choice sounds competitive. It is not.

VantageScore is owned by the three national credit bureaus, who control the pricing and distribution of both the FICO Score and VantageScore 4.0. Under lender choice, the credit bureaus will control all competitive levers—creating an unlevel playing field that will disadvantage any credit score other than VantageScore. With a tri-merge mandate, there can be no meaningful competition in the conforming mortgage industry unless and until the credit bureaus fully divest their ownership of VantageScore. Bottom line, introducing “lender choice” in scores while eliminating choice in credit reports further entrenches the credit bureaus’ market power and will do nothing to encourage competition.

Lender choice sounds healthy for the market. It is not.

FICO competes and wins every day in consumer credit industries across the economy where lenders make a loan and retain the risk, including in auto, credit card, and non-conforming mortgage industries. In these industries, lenders overwhelmingly choose the FICO Score to underwrite the loan as it is the most advanced, predictive score available. In the conforming mortgage space, where lenders retain no risk, incentivizing these lenders to choose a less rigorous, less predictive score when U.S. taxpayers are ultimately on the hook is grossly irresponsible. It would also force mortgage insurers, investors, and others to use a significantly less effective score in their prepayment, pricing, underwriting, and capital requirement models. The interim “lender choice” policy would both diminish the reliability and consistency of the ultimate lending decision and reintroduce real risks such as adverse selection and gaming, which leads to poorer performing models for investors downstream, and which will ultimately result in increased costs to consumers.

We’ve seen this before. The 2008 financial crisis taught us the cost of racing to the bottom with lax origination standards. FICO calls on FHFA and the GSEs to fully implement the GSEs’ original decision, including implementing FICO® Score 10 T, as soon as possible—to enable access to the most advanced, validated, and trusted credit score available.

Click here to download the full white paper: FICO® Score 10 T Materially Outperforms VantageScore 4.0