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.