AEI Reignites Credit Score Debate, Contests VantageScore’s Claims

The fight over credit scores just got more complicated for subprime lenders. A new challenge from the American Enterprise Institute (AEI) undercuts VantageScore’s claims that its 4.0 model is more predictive than Classic FICO.

That raises doubts about whether the Federal Housing Finance Agency’s (FHFA) move to allow both models will expand access — or simply inject more confusion, higher costs, and looser risk controls into the subprime market.

AEI identified two flaws in the company’s white paper: first, an apples-to-oranges comparison of VantageScore’s tri-merge approach with FICO’s “middle of three, or lower of two” method; and second, selection bias from limiting the sample to loans with FICO scores of 720 or less.

Once those flaws were corrected, the supposed edge largely disappeared. Classic FICO posted a Gini coefficient of 38.5% compared with VantageScore’s 37.0%, giving FICO a 4.1% lift.

It also held a 5.4% lift on the Kolmogorov-Smirnov statistic. The bottom-decile lift narrowed to just 3% for VantageScore, far below the 9% initially claimed.

The predicament came just weeks after the Federal Housing Finance Agency gave the green light for lenders who sell to Fannie Mae and Freddie Mac to switch to VantageScore 4.0 or Classic FICO.

The swap put an end to decades of FICO’s single-score rule. Reformers hailed the breakthrough, but skeptics were worried it could pave the way for confusion.

The debate boils down to how the models define risk. VantageScore pitches itself as more inclusive, saying it can rate millions of borrowers FICO leaves unscored and that its model integrates trended data.

FICO references its decades-long experience and regulator credibility. AEI’s analysis cuts down the claim of an important performance gap, hinting the differences are modest at best.

FICO has also been batting back criticism about its fees, which climbed from about 60 cents in 2018 to nearly $5 today. CEO Will Lansing insists those fees don’t block loans. He told Bloomberg no lender walks away from a deal because of score costs.

Lansing’s bigger worry is score shopping — lenders picking the model that yields more approvals rather than the one that flags repayment risk. That, he warned, could lead to more defaults and higher costs downstream.

VantageScore pushes back, arguing its model broadens access and captures patterns Classic FICO misses. The company highlights data showing its 4.0 version spotted more defaults during the COVID-19 period. AEI’s recheck of those claims shows they weaken when applied across wider loan pools.

A VantageScore spokesperson rejected AEI’s conclusions as “false and not to be relied upon.” The spokesperson argued the AEI authors lacked quantitative backgrounds and used outdated tools, while pointing to independent studies from major financial institutions that found VantageScore 4.0 more predictive than Classic FICO.

The debate has real consequences. Investors need consistent metrics to price mortgage-backed securities, but dueling credit scores muddy the math. A borrower who scores 720 with FICO might show up anywhere between 660 and 800 on VantageScore, creating mismatches that ripple through loan pricing and risk models.

The gap makes it difficult to map today’s Loan Level Pricing Adjustments onto the new framework. The problem is compounded by a lack of historical data on borrowers who were denied under FICO but might qualify under VantageScore — leaving investors without a consistent way to price risk.

Critics warn those gaps, along with the possibility of score shopping, could loosen credit standards, increase default risk, and drive up the cost for all borrowers.

The subprime industry uses automated systems for tight operations, and another score means additional compliance processes, higher tech expenses, and more complex workflows. Supporting additional models blurs risk filters, which can lead to scams and more delinquencies.

When investors call for greater risk compensation, higher expenses trickle down to the riskiest borrowers — the very ones least able to support them.

Political and market pressure for broader access hasn’t faded. The pandemic’s affordability squeeze, combined with long-running frustration over FICO’s dominance, has fueled support for alternatives.

VantageScore backers argue that competition drives innovation — such as factoring in rent and utility payments. But studies by Milliman and the Urban Institute suggest the practical differences between the models are minimal.