Credit-monitoring companies that are notorious for mistreating consumers have been granted a golden opportunity to expand their business thanks to a sudden reversal by the Trump administration.
The federal government buys and guarantees residential mortgages through its companies Fannie Mae and Freddie Mac. As part of the underwriting process, the government-sponsored enterprises check applicants’ credit ― specifically their FICO score, a product made by a data analytics company called the Fair Isaac Corporation.
Fair Issac buys data from Equifax, Experian and TransUnion, the three major credit-monitoring companies, to produce a score used to gauge the likelihood that a consumer will not default on mortgage debt. But the big three have their own scoring system, which they produce as a joint venture called VantageScore Solutions, that they want the government to use instead.
The Federal Housing Finance Agency (FHFA) announced this week that it would be happy to give VantageScore a chance, despite saying last December that using it presented a clear conflict of interest that could lock out competition and increase prices for the government and consumers.
Consumer advocates don’t consider Fair Isaac some kind of angel, and they don’t think there’s anything inherently shady about VantageScore. But they argue that if both the score and the underlying information come from the same company, that firm will become too powerful.
“They’re going to squeeze FICO out,” the National Consumer Law Center’s Chi Chi Wu said in an interview. “Once that happens in the mortgage market, the issue is whether that will spread to other markets.”
Not to mention the fact that Equifax, Experian and TransUnion have a terrible track record. They have a habit of failing to correct false information in people’s credit reports, resulting in hundreds of thousands of complaints to government watchdogs. And just last month, Equifax agreed to a $700 million settlement with the Federal Trade Commission over the company’s failure to secure consumer data on 147 million Americans.
Why did the government change its mind? Well, the FHFA had a change of leadership. Former Rep. Mel Watt (D-N.C.), an Obama appointee, stepped down as the agency’s director in January. President Donald Trump replaced him with Vice President Mike Pence’s chief economist, Mark Calabria, who previously worked on housing policy for the Senate Banking Committee and at the Department of House and Urban Development during the George W. Bush administration.
“One of my priorities is to ensure that the American people have a safe and sound path to sustainable homeownership, which requires tools to accurately measure risk,” Calabria said in a press release announcing the credit score reversal.
Calabria’s agency justified the new decision by pointing to a section of the bank deregulation bill Congress passed last year that specifically directs the FHFA to consider alternatives to FICO. Sen. Tim Scott (R-S.C.) said the policy would benefit people with limited credit histories, including African Americans, because FICO omits data on rental and utility payments. It just so happens that including such data is VantageScore’s top selling point.
The FHFA said in December 2017, however ― when it first asked for input on whether to branch out from FICO ― that it was already able to collect that kind of borrower information, and that its own “automated underwriting systems more precisely predicted mortgage defaults than third-party credit scores alone.”
Switching the score model would also take a while and potentially disrupt the industry, Chris Whalen, an investment banker focused on housing finance, told the FHFA earlier this year in response to its original version of the proposed regulation.
“Far from reflecting the convenience and needs of the mortgage industry or consumers, this absurd requirement [to consider FICO alternatives] is the result of political pressure by one of the credit reporting agencies,” Whalen said.
Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy up mortgages, will soon open up a competitive process for choosing which credit score to use. The choices will come down to FICO and VantageScore, the only two big players in the market.
VantageScore president Barrett Burns said in a statement “there is now is a viable pathway for VantageScore and other new and innovative model developers to compete and elevate the predictiveness and inclusivity of credit scoring models.”