Important discussions are taking place regarding the future of consumer credit and mortgage lending. These discussions have serious long-term implications, so it is vital that we get the facts right.
Unfortunately, John Bowman's recent opinion piece in American Banker gets the facts completely wrong. His article is a direct attack on Fair Isaac's FICO score from a party whose law firm, Venable LLP, is registered to lobby on behalf of Experian and VantageScore. (He discloses the latter in his piece.)
Bowman's arguments are based on two erroneous assertions: that the government has made the credit scoring market uncompetitive, and that reliance on the FICO score poses a systemic risk to the financial services industry. I'd like to set the record straight.
There has always been competition in the credit scoring market. The FICO score became the leading score because its performance was the strongest and because we remain committed to our original principles of safety and soundness in lending as well as democratizing access to credit. For example, our commitment to safety and soundness is why we won't chase our competition by building a score with inappropriately lax minimum scoring criteria.
Today there are many competing credit scores on the market, including those developed and offered by each of the three credit bureaus individually, as well as the VantageScore, which the bureaus jointly own and offer. VantageScore claims it serves seven of the top ten financial institutions, including the top five mortgage lenders and eight of the top ten credit card issuers. This clearly contradicts Bowman's assertion that the market is uncompetitive.
Still, lenders choose the FICO score for many credit decisions. Why? Trust and performance. FICO has over 50 years of experience building and refining a superior product. Unlike competing scores, the FICO score has been vetted, tested and validated countless times by banks, regulators and a multitude of stakeholders. This relentless testing has occurred in periods of rapid economic expansion and in recessions. Contrary to Bowman's suggestion, the FICO score proved stable and reliable, consistently and accurately ranking risk before, during and after the 2008 recession.
Contrary to another of Bowman's claims, the widespread use of the FICO score has helped, not hurt, the American economy. Gone are the days of subjective underwriting. The advent of the FICO score has helped America build the world's most advanced and democratic consumer credit system, where credit is available for every creditworthy consumer regardless of age, race, gender, religious affiliation or, indeed, economic background.
Bowman's charge alluding to systemic risk is pure fiction and irresponsible fear-mongering, based in part on the notion that FICO could somehow "withhold or be unable to provide" scores to lenders. The truth is, FICO has taken extra steps to remove the possibility of a market disruption. Our new, long-term contracts with the credit bureaus eliminate this risk by ensuring that lenders can, for the first time, purchase a long-term license of the FICO score directly from us. Any lender can also license our scoring software and calculate the FICO score in-house or through a third-party processor, further ensuring that no one can interfere with a lender's access to the FICO score.
Bowman also states that Fannie Mae and Freddie Mac guidelines require the use of the FICO score. As a former regulator, Bowman knows that lenders, not the government-sponsored enterprises, are responsible for making the origination decision and may elect to use their own or third-party scores as part of the underwriting process. He is also aware that the GSEs have a manual underwriting process that enables non-scorable consumers to have loans accepted for purchase by the GSEs. There are also multiple ways for lenders to achieve Qualified Mortgage status for their loans, giving lenders the choice of whether or not to use FICO scores in mortgage underwriting. In short, the scenario that Bowman presents is different from reality.
Having a sound and stable credit market is essential to America's economic recovery and growth. FICO continues to adapt and refine solutions to support that growth. What is critical to these conversations is factual rigor and honesty in decision-making with the goal of stable, predictive growth that benefits and supports both the individual consumer and the larger credit and housing markets.
Joanne Gaskin is senior director of Fair Isaac's scores and analytics group and head of the company's mortgage practice.