Momentum of third-party credit scores to challenge FICO

VantageScore totaled 12.3 billion scores across consumer credit loan categories over a 12-month period between 2018 and 2019, according to a report from consulting firm Oliver Wyman.

That figure increased 20% over the same period from the year prior — a rate of annual growth the credit score developer exhibited since 2015. The consumer loan categories included auto, credit card and personal, but not mortgages, giving it a potential to ramp up its use.

"Having compiled this report for the third year in a row, we see impressive gains in market usage of VantageScore credit scores," Peter Carroll, partner at Oliver Wyman, said in a press release. "Notably, we observed growth, in particular, amongst lenders using VantageScore for origination and other credit decisions, which demonstrates that lenders don't appear to be as tethered to legacy processes as they once were."

The Oliver Wyman study showed alternative credit scores are gaining on FICO, an important development in a transitioning time for the industry.

FICO, notoriously tight-lipped when it comes to disclosing its business volume, divulged its totals in July. FICO President and CEO William Lansing said on an earnings call that 14.5 billion FICO scores for B2B were sold this year. That compares with about 13.5 billion in 2007 before the financial crisis, and roughly 9 billion in 2008, during the post-housing crash low point of the mortgage market.

"The continued surge in usage of VantageScore credit scores is a testament to an increasingly competitive marketplace for credit scores as well as the VantageScore model's accuracy and inclusivity," said Barrett Burns, president and CEO of VantageScore Solutions. "Consumer lenders are hungry for new and innovative approaches to consumer credit underwriting and clearly favor a competitive market that casts a wide net for scoring potential applicants in a safe and sound manner."

After years of lobbying, VantageScore may be blazing its trail into the mortgage market by having the Federal Housing Finance Agency allow government-sponsored enterprises to use third-party credit score models to compete with FICO, the long dominant provider of mortgage credit scores.

"This is a major undertaking for the enterprises," Burns said in an interview. "It creates an opportunity for consumers but the regulators don't want to rush through this thing. Which is good, we are in favor of that."

Both Fannie Mae and Freddie Mac require FICO scores from mortgage applicants for their underwriting process. A 2018 proposal said developers sharing common ownership with a consumer data provider had a conflict of interest. VantageScore is jointly owned by the three credit bureaus. Under Director Mark Calabria, the FHFA reversed its decision in August by allowing all credit score developers to vie to compete with FICO scores as long as they meet requirements.

FICO doesn't see much changing with the ruling and the status quo remaining in place.

"Fannie Mae and Freddie Mac always had the ability to test and pick a new score," Joanne Gaskin, FICO's vice president of scores and analytics, said in an interview. "They don't owe any duty to FICO, we could be replaced at any given time. There's no contractual obligation. With FHFA required to go into rulemaking, it added a layer of bureaucracy to it but also transparency about how the process would go. We fully anticipate on any measure, FICO scores will win on terms of predictive strength and stability so we're more than happy to compete for the position."