Investors are celebrating a major shake-up in how FICO scores will be shared with mortgage lenders, as shares of parent company Fair Isaac Corp. have rallied more than 20% on Thursday.
That stock rally follows FICO’s announcement on Wednesday of a new pricing model that will allow mortgage lenders to calculate and distribute credit scores directly to borrowers, thereby eliminating the need to rely on the three nationwide credit bureaus for this information. In addition to its legacy pricing model, lenders can now opt for a direct license option that will save them up to 50% on per-score FICO fees.
The FICO score is one of a few different credit scoring models that help lenders assess how likely a borrower is to pay back a loan. According to FICO, the score is used by 90% of top U.S. lenders.
The new program “puts pricing model choice in the hands of those who use FICO scores to drive mortgage decisions,” Will Lansing, CEO of Bozeman, Montana-based FICO, said in a statement. A direct licensing program was “always a possibility,” Lansing said in an interview with CNBC on Thursday, but this move was primarily motivated by a call for increased competition and lower prices by Bill Pulte, director of the Federal Housing Finance Agency.
FICO UNDER FIRE
Beginning in May, Fair Isaac came under fire by Pulte, who said he was “extremely disappointed” about FICO’s announcement of a price hike for credit scores. Then, in July, Pulte announced that mortgage lenders could use a rival credit score, the VantageScore, to evaluate potential borrowers, and even called FICO a “monopoly.”
“I think we have responded to the call, and so I think there will be a lot of happiness around the idea that the score prices are flat to down for next year, and we have competing channels of distribution,” Lansing said on CNBC. Containing costs throughout the mortgage lending system will ultimately trickle down to consumers, he added.
The surge in Fair Isaac’s stock price on Thursday follows a three-month sell-off of nearly 41% amid Pulte’s criticism of FICO scores.
In a post on the X platform on Thursday, Pulte said he “genuinely” appreciates that FICO responded to constructive criticism with creative solutions that ultimately benefit American consumers. “While their decision is a first step, it is appreciated. I encourage the Credit Bureau’s [sic] to also take similar creative and constructive actions to make our markets safer, stronger, and more competitive.”
CREDIT BUREAUS SLUMP
But what’s seen as good news for FICO, at least according to shareholders, isn’t so good for the three credit bureaus. Shares of Experian, TransUnion, and Equifax fell between 4.3% and nearly 10% on Thursday.
Direct licensing could eliminate the margin that credit bureaus currently earn on the FICO credit score, according to Citigroup analysts. “Our initial reaction is this is negative for Experian and Equifax,” they wrote in a note.