FICO Increases 400% For Tier 3 Lenders

Finding solutions in soft pull credit reports

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Chrissy Brown

As lenders reached the final stretch of a very challenging 2022, they were met with the news of yet another obstacle. One that adds an additional layer of financial strain to an already struggling industry. Obviously, any financial increase for our industry adversely impacts the American homebuyer. Especially when there is very little to zero margin that allows the lenders to absorb the increase. As most everyone knows at this point, FICO has increased their fees by 400% for Tier 3 Lenders.

What is a Tier 3 Lender? Long and short, most of all lenders. There are 46 lenders in Tier 1 and 6 lenders in Tier 2. They state the tiers are based off volume. Up until this point, FICO has charged a $.60 royalty to all lenders, regardless of size. As of 2023, the playing field will be uneven based on your tier.

Why is this concerning the affordable housing issue that is affecting our industry? As with any industry, when the cost to produce increases, the end user feels the impact. Historically, data proves that the IMB sector originates most of the affordable housing loans. Most of the IMBs fall into the Tier 3 sector. Therefore, the lenders that are not as adversely impacted can charge less.

However, they are not the lenders originating for this demographic. Isn’t this counterintuitive to everything we continue to hear? As a lender, we are constantly getting pressure from the government agencies to solve this crisis in our Nation. It is frustrating to be the ones delivering on this issue and then receive more adverse pricing. At the end of the day, it is unfair to the borrowers wishing to obtain the dream of homeownership.

The affordable housing crisis in America is real and progressively got worse throughout 2022. Affordability … has hit the worst level in 37 years.

The affordable housing crisis in America is real and got progressively worse throughout 2022. Affordability (as quoted by Yahoo Money via Black Knight data, September 2022) has hit the worst level in 37 years. As of September 2022, the income-to-payment was 35.51%. As stated in that article, it is the highest income-to-payment ratio since October 1985, which was 36.01%. Not an ideal environment to increase cost to produce.

Why is FICO doing this? “Beginning in December 2022, consistent with other markets such as auto loans, credit cards and personal loans, and based on changes in pricing from our third-party supplier, FICO scores will be priced at a tier-based pricing structure for mortgage,” a statement from an Equifax spokesperson said. “As a result of this change, Equifax recently informed customers that on Jan. 1, 2023, Equifax will move mortgage industry pricing to this tier-level structure. The new tiered pricing structure to the bureaus is tied to the entire mortgage industry.”

To be fair to this situation, a peer of mine made a very solid observation. Most likely the rise in SoftQual/SoftPull technology is going to hurt the overall bottom line for the large bureaus. What is SoftQual/SoftPull? It’s the ability to run up to a three-bureau credit report without having any impact on the score.

This technology is a game changer when working with folks that have credit challenges they are trying to overcome. They can work on their credit without having that constant impact to their score. The cost is substantially less than a full tri-merge report. You still must obtain a tri-merge in order to close. However, the pull through rate of credit pulled to close would shock you. To lower that amount is a win for lenders/borrowers and a loss for the bureaus.

The industry has some strong feelings about this not being fair and/or the right time to add an additional cost to an already strained industry. As this change probably “is what it is,” our hope is that we can continue to leverage the SoftQual/SoftPulltechnology to provide a better and cheaper solution for our clients.