Something unusual is happening in the U.S. consumer credit information industry.
Share prices of Fair Isaac, Equifax, TransUnion and Experian have been under pressure for some time. The pressure accelerated in September as the Federal Housing Finance Agency (FHFA) moved to introduce greater competition into mortgage credit scoring and expanded lenders’ ability to use VantageScore 4.0 as an alternative to Classic FICO.
Now another part of the established structure is being challenged. FHFA is reportedly preparing to allow lenders selling mortgages to Fannie Mae and Freddie Mac to obtain credit information from only two of the three nationwide credit bureaus rather than the traditional tri-merge report containing information from Equifax, Experian and TransUnion.
An further announcement may come as early as October 12.
The Consumer Data Industry Association (CDI) has now responded. Its position is straightforward: more data, not less, produces better outcomes, and eliminating one of the three credit files could introduce additional risk and unintended costs.
This debate goes considerably beyond the price of a credit report.
For decades, the U.S. mortgage credit information infrastructure has rested upon an unusual structure: three dominant national credit bureaus supplying the underlying information and FICO occupying an equally powerful position in transforming that information into a credit score.
Both arrangements are now under pressure. And that raises questions for which we do not yet have satisfactory answers.
If lenders may choose any two bureaus, who determines which bureau is left out? Are the three possible bureau combinations equally predictive? Are there material differences in coverage, data quality or timeliness among Equifax, Experian and TransUnion? Could lenders select bureau combinations that produce more favorable borrower outcomes? If so, what safeguards would prevent “bureau shopping”?
And there is an even more fundamental question.
How much additional predictive information does the third credit bureau actually provide? If the answer is very little, bi-merge could reduce costs without materially weakening credit decisions. If the third bureau sometimes provides information unavailable from the other two, the issue becomes considerably more complicated.
Meanwhile, competition between FICO and VantageScore raises another set of questions about scoring methodology, pricing and market power.
We may therefore be witnessing something larger than another regulatory attempt to reduce mortgage closing costs. The longstanding structure of the U.S. consumer credit information industry may be beginning to change.
There are still more questions than answers. FHFA may provide some of them on October 12.
Stay tuned.
Source: Press commentary, CDIA, IEI research supported by ChatGPT