VantageScore notches a win in FICO-dominated securitization market

The FICO credit score has long been dominant in consumer securitizations — where lenders bundle consumer loans so that investors can buy a chunk — but that may be starting to change.

The credit card issuer Synchrony Financial used FICO’s top competitor, VantageScore, on a recent $1 billion securitization deal.

VantageScore, which is owned by the three major credit bureaus, remains far from dethroning FICO from its dominant role in the industry. But industry analysts say the deal was notable given that Stamford, Connecticut-based Synchrony is among the country’s largest credit card issuers.

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“Synchrony is a trophy name for VantageScore. There’s no question about it,” said Brian Riley, a director at Mercator Advisory Group.

Still, VantageScore has significant ground to make up in its effort to become as widely adopted as FICO — both in the loan-decisioning process and in the bundling of those loans into securities for investors. Lenders are increasingly using non-FICO sources in making their credit decisions, but analysts say the shift has been less rapid in the securitization market.

Issuers in public offerings used FICO in 98.4% of securitizations by dollar, a 2018 Mercator study found, and FICO’s lead hasn’t shifted since.

VantageScore declined to comment on the Synchrony deal, though it pointed to a recent survey it commissioned that found 93% of investors were open to issuers using alternatives to conventional credit scoring.

"There is clearly demand to move away from the status quo with an emphasis on increased inclusivity and transparency, which are two areas where VantageScore is best in class,” VantageScore President and CEO Silvio Tavares said in a press release.

VantageScore says its use of alternative data allows it to rate far more people who have thin or no credit history, enabling more people to access traditional credit options. But FICO has long disputed VantageScore’s assertions and says its new models can reliably score millions more people than before.

In a statement, FICO said its scores “remain the leader in the U.S. securitization market, used in the vast majority of securitization disclosures.”

The battle between the two companies is also playing out at the Federal Housing Finance Agency, which held a hearing in March on whether the mortgage industry should shift away from the classic FICO credit score developed in 2003. For years, the agency has weighed endorsing newer versions of FICO, moving to VantageScore or using a mix of credit scores.

The FHFA, which oversees the government-sponsored entities Fannie Mae and Freddie Mac, has floated several options that include keeping a single score on loans, requiring multiple scores and switching to a “lender choice” model that lets mortgage lenders use whichever score they prefer.

FICO has asked the agency to maintain a single credit score, arguing that new models could sow confusion and be expensive to implement. But VantageScore says the FHFA should adopt the “lender choice” approach and bring more competition to the credit scoring industry.

Synchrony declined to comment on the switch to VantageScore in its securitization. But the credit card company has been using VantageScore in its loan-making process for some time. In its 2020 annual report, Synchrony said it believes VantageScore rates “more U.S. consumers, and potential applicants, as compared to our prior use of FICO credit scores.”

For Synchrony, switching to VantageScore in securitizations for investors makes sense because it is consistent with its use of VantageScore in the loan-making process, said John Ulzheimer, an expert on credit scores and president of the Ulzheimer Group.

Nabbing Synchrony is a “huge feather in the cap” for VantageScore, he said. But he also cautioned against overplaying the move’s significance in the massive market for consumer loans.

“It’s almost like a wave in an ocean,” Ulzheimer said.