Shares of Fair Isaac Corp. jumped in morning trading on Thursday after a US data analytics firm announced it would directly license credit scores to mortgage resellers. This development has sparked worries about potential margin pressures for major credit bureaus.
The stocks of Experian, Equifax, and Transunion took a hit, as the move raised fears that it could diminish the temporary role these credit reporting companies play.
The FICO score, developed by Fair Isaac, is a credit scoring system utilized by nearly 90% of lenders to determine borrowers’ creditworthiness.
A higher FICO score indicates a lower risk of default.
Fair Isaac mentioned that this direct access to FICO scores for lenders and mortgage resellers enhances competition and increases price transparency.
“This new delivery model enables lenders to bypass the existing approximately 100% markup. Credit departments currently pay for FICO scores,” noted analysts from Raymond James.
Bill Palt, the director at federal housing finance agencies, applauded Fair Isaac’s initiative, stating in a post on the social media platform X that it signifies the company is crafting “creative solutions” to aid American consumers.
Earlier this year, Palt had criticized the company for its pricing as he advocated for a broader adoption of competing scoring models in mortgage lending.
After his remarks, FICO saw an uptick in profits, with a notable 26% increase, suggesting that if this trend persists, its annual losses could be fully mitigated.
Citigroup analysts weighed in, expressing that the direct licensing approach could lower the margins that organizations like Experian and Equifax earn from their FICO credit scores.
“Our initial assessment indicates this development is negative for Experian and Equifax,” they commented in a report.
As a result, Experian’s shares dipped by 4.8% in London, while Equifax’s plummeted by 7% in the US and Transunion’s fell by 11%.
While Experian, Equifax, and the Consumer Data Industry Association did not immediately respond to requests for comments, Transunion chose to refrain from commenting.
Industrial Shift
The decline in stock prices followed Palt’s endorsement of allowing lenders to utilize Vantagescore for mortgages backed by Fannie Mae and Freddie Mac. Introduced in 2006, Vantagescore is a collaborative initiative involving Equifax, Experian, and Transunion.
This decision by the agency has ignited speculation about its capability to introduce direct competition against FICO in the mortgage sector and maintain price elevations.
“This could potentially yield an FHFA-friendly outcome,” remarked brokerage Needham, which might help alleviate certain “FHFA overhangs” in stock valuations.
Fair Isaac asserted that the direct licensing of mortgage scores would lead to immediate cost reductions for lenders, brokers, and others in the industry. It clarified that those preferring to operate through credit departments could still opt to do so.
“These changes remove unnecessary markups on FICO scores and provide users with varying pricing options for mortgage-related decisions,” stated CEO Will Lansing.
This shift could ramp up competition within the credit scoring industry, enabling lenders to access their FICO scores directly.
“By rolling out the Tri-Merge Reseller licensing program, FICO is effectively reducing credit bureaus’ leverage over FICO score pricing,” an analyst from Jefferies pointed out in a memo.
The new model hinted that credit bureau revenues might dwindle to an average of 10%-15%. “For the bureaus to maintain their pricing power, they will now need to negotiate directly with lenders and compete amongst themselves,” noted the analyst.
