Clash of the credit score titansTerry W. ClemansEquifax, Experian, TransUnion, VantageScore, Fannie Mae, Freddie Mac
A battle that started almost two years ago in federal court may
soon have major implications on mortgage credit standards and the
mortgage industry's risk-based pricing models.
Let's look at some key history first: Back in March 2006, the
nation's three consumer credit repositories (Equifax, Experian and TransUnion) jointly announced
the introduction of a new credit score, which, according to their
claims, was designed to simplify and enhance the credit process for
both consumers and credit grantors.
Their new product, VantageScore, claims to be a
more consistent and objective approach to credit-scoring
methodology across all three national credit repositories. It is
further claimed that under the new credit scoring system, score
variance between credit reporting companies will be attributed to
data differences within each of the three consumer credit files and
not to the structure of the scoring model or data interpretation.
VantageScore uses a score range of 501 to 990 instead of the
typical FICO score range of 400 to 850.
There were concerns expressed immediately by many in the credit
industry that the new score, with a range that does not parallel
the FICO range, would create greater confusion for consumers
already struggling to understand credit scoring. A consumer with a
700 FICO score will get you a home loan easily. A consumer who has
a 700 VantageScore is going to be a very tough loan to close
today.
Fair Isaac Corporation,
FICO's creator, was also not going to take this new score lightly.
The company fought back, claiming state and federal laws were
violated. In October 2006, the Minneapolis-based corporation filed
suit in the Federal District Court of Minnesota, alleging that the
three national credit repositories and their jointly owned entity,
VantageScore Solutions LLC, violated antitrust laws and engaged in
unfair competitive practices. In its suit, Fair Isaac Corporation
alleged that through their launch and marketing of the VantageScore
credit scoring model, they were jointly engaging in unfair and
anti-competitive practices that harmed the FICO credit score brand
and goodwill that Fair Isaac Corporation spent 50 years
creating.
Currently, the case of Fair Isaac Corporation vs. Equifax,
Experian, TransUnion and VantageScore Solutions LLC is still
pending (surviving the motion to dismiss filed by the defendants)
with the FICO claims of a) unfair competition under the Lanham Act;
b) trademark infringement in both federal and state jurisdictions;
c) false advertising in both federal and state jurisdictions; d)
deceptive trade practices and unjust enrichment (state only); and
e) Sherman Antitrust Act violations under sections 1 and 2 (attempt
and conspiracy to monopolize the credit score market).
A court order entered on Aug. 28 set a deadline for dispositive
(summary judgment) motions of Oct. 15, 2008 and a tentative trial
date of Feb. 1, 2009. No substantive details of the case have
emerged and most likely will not until the summary judgment motions
are filed.
In addition to the litigation, in 2006, Fair Isaac Corporation
also filed a complaint to the U.S. Department of Justice
Antitrust Division, which started an inquiry into VantageScore
and allegations that the credit repositories had violated antitrust
laws with the creation of the new scoring system. After about nine
months of review, the Justice Department reported in January of
this year that the inquiry had been closed without further action
on their behalf. This is not the first look into actions of the
credit reporting industry by the Justice Department. The Justice
Department has previously brought action against the credit
reporting industry for antitrust violations and has held the
industry under consent orders for a period of more than 50
years.
Moving forward, the next potential battle line seems to be in
the use of the new score, and the mortgage industry is directly in
the crossfire.
As of now, the VantageScore seems destined to be headed for the
same path as Fair Isaac Corporation's NexGen scores of 2002--scores
that were widely acclaimed by their creator but never received
support or an endorsement from Fannie Mae, Freddie Mac or any other major
mortgage lenders.
Wanting to avoid a similar fate, the repositories may be turning
up the heat on the mortgage industry by stalling on the next update
to the current FICO credit score models available from the credit
repositories. Repository sales associates have been reminding
credit industry professionals that their VantageScore already has
many of the features to be implemented in the latest FICO updates.
Pressure is being put on Fannie Mae and Freddie Mac to move to the
VantageScore instead of the traditional FICO score, despite
concerns about consumer confusion.
The correction promised by Fair Isaac Corporation, which would
offer lenders a remedy to the recent trend of credit-score
piggybacking and other updates, may not get implemented this fall
as originally planned. If these stall tactics are successful and
Fannie Mae, Freddie Mac or some other major mortgage lender
switches to the VantageScore, you may need to learn an entire new
credit scoring system.
Terry W. Clemans is the executive director of the National Credit Reporting Association
Inc. He may be reached at (630) 539-1525 or e-mail
[email protected].
