An impasse between Fair Isaac Corp. and one of the three major credit bureaus threatens to stymie the rollout of the newest version of the FICO score — and, possibly, the eradication of the controversial practice of credit "renting."
Equifax Inc. says it will not offer FICO 08, the fifth release of the market's predominant credit score, to lenders, or do any of the preparation work, at least until litigation between Fair Isaac and the three bureaus is resolved. The other two big bureaus, Experian Information Solutions Inc. and TransUnion LLC, are getting ready to offer the new version, which Fair Isaac had hoped would be available through all three by early next year.
"Until that lawsuit is resolved, our relationship with Fair Isaac is strained," Paul J. Springman, Equifax's chief marketing officer, said last week. "Whenever we take care of the lawsuit, then we decide what to do with FICO 08."
A key feature of the new version of FICO is that unlike earlier ones, it does not take into consideration credit card accounts for which the person being scored is an authorized user. In recent years a cottage industry has sprung up of Web sites that arrange for subprime consumers to boost their scores by becoming authorized users on accounts held by strangers with better credit. The inflated scores help the consumers get loans they would not have qualified for otherwise; the people "renting" out their creditworthiness get a fee, of which the intermediary gets a cut.
"This is a problem that our members have been talking about for well over a year," said Corey Carlisle, the senior director of government affairs and residential loan policy at the Mortgage Bankers Association. "The exploitation of this authorized user account … caused the job of underwriting to be that much more complicated."
Some credit-renting companies have even advertised themselves to lenders as a means to increase the score of applicants and qualify them for loans, Mr. Carlisle said. The trade group is "very pleased that" Fair Isaac "made the change."
Equifax, however, points out that VantageScore, an alternative to FICO scores offered by a joint venture of the three bureaus since last year, has never considered authorized-user accounts and thus offers another way to protect against getting manipulated scores. "VantageScore excludes the authorized user, which is what lenders are interested in," Mr. Springman said.
Tom Quinn, Fair Isaac's vice president of global scoring, would not discuss Equifax's refusal to promote FICO 08. His company is "working with two of the three bureaus to get it implemented," he said.
But Fair Isaac acknowledges that the distribution of FICO 08 depends on the lenders' demand and on bureaus' desire to promote it. "The work has been done on our part," said Craig Watts, a spokesman for the Minneapolis company. "What remains is for the credit bureaus to implement that model, to install that software if you will and make this system available to lenders."
Fair Isaac also acknowledged this week that VantageScore is gaining traction. The company is "experiencing some pricing pressure," Mark Greene, Fair Isaac's chief executive, said on an earnings conference call Tuesday.
"Probably the most notable external competitor would be VantageScore, and we do see that product being evaluated and tested in the marketplace," Mr. Greene said.
Last year Fair Isaac sued the three bureaus and their joint venture, VantageScore Solutions LLC, accusing them of using unfair and anticompetitive practices to harm the FICO brand. The case is in discovery.
Whatever their feelings about the suit, the other two bureaus have not responded to it in the same manner as Equifax.
Susan Hansen, an Experian spokeswoman, said the Costa Mesa, Calif., company is analyzing FICO 08 to "determine technical requirements" of the software. A TransUnion spokesman wrote in an e-mail that the Chicago company's staff "will work closely with customers interested in validating and testing this new solution once it becomes available at TransUnion."
Several observers said that even if all three bureaus were on board, it could take as long as 18 months for FICO 08 to become widely adopted.
John Ulzheimer, a former executive at both Fair Isaac and Equifax, said as many as three "generations" of FICO are still being used by lenders and supported by the bureaus.
"Lenders are hardly ever enthusiastic" about upgrades, said Mr. Ulzheimer, who is now the president of educational services at the lead aggregator Credit.com Inc. "If they have a target of approving a certain percentage of applicants and they simply switch one score for another, then they may penalize themselves without understanding how their distribution is going to change."
However, he said that if Equifax did not adopt FICO 08, it would prolong the life of the authorized-user loophole. "It would stay in the Equifax world," Mr. Ulzheimer said. "It would be there in the Equifax model" for FICO scores.
But if a large bank were to demand that Equifax offer FICO 08, the credit bureau would change its stance "in a heartbeat," Mr. Ulzheimer said. An Equifax spokesman would not say what it would do with its customers who ask for the updated version.
When told that one bureau may not support FICO 08, the MBA's Mr. Carlisle said that "there are other bureaus."
