FICO to license scores directly to lenders skipping credit bureaus

Key Concepts:

• FICO score: Credit score used by 90% of lenders to determine mortgage eligibility and interest rates.
• Credit Bureaus: TransUnion, Equifax, and Experian; act as middlemen distributing FICO scores to lenders.
• Direct Licensing: FICO licensing its scores directly to lenders, bypassing credit bureaus.
• FHFA: Federal Housing Finance Agency, oversees Fannie Mae and Freddie Mac.
• Pricing Model Choice: Lenders having the ability to choose the pricing model for FICO scores.

FICO's Direct Licensing and Impact on Credit Bureaus

Fair Isaac (FICO), the provider of FICO scores, is now licensing its scores directly to lenders, a move that is causing its stock to surge while putting pressure on the stocks of credit bureaus like TransUnion, Equifax, and Experian. These bureaus have traditionally acted as intermediaries, charging markups on FICO scores.

Financial Implications

The credit bureaus' stocks are taking a hit because FICO's direct licensing eliminates the markups they charged. FICO's stock is up significantly. FICO will charge a fee of $4.95 for each credit score, which represents a 50% reduction in the fee charged by the merge system of the three credit bureaus. FICO then charges $33 when the loan closes.

FICO's Perspective

FICO CEO Will Lancing stated that this change "eliminates unnecessary markups on the FICO score and puts pricing model choice in the hands of those who use FICO scores to drive mortgage decisions."

FHFA's Involvement and Perspective

FHFA Director Bill Py, who oversees Fannie Mae and Freddie Mac, has been critical of FICO and the credit bureau pricing. Last spring, he attacked FICO and the credit bureau pricing saying on X that he is not happy with FICO. He later announced a full-scale review of the credit bureaus. Py acknowledged FICO's decision as "a first step" and encouraged credit bureaus to take similar actions to improve market competitiveness.

Conclusion

FICO's decision to license its scores directly to lenders is a significant shift in the mortgage industry. It aims to reduce costs for lenders and give them more control over pricing models. While the FHFA sees this as a positive step, it also calls on credit bureaus to adapt and become more competitive. The move has immediate financial consequences, with FICO's stock rising and credit bureau stocks facing pressure.