Written by: Eric Bank
Edited by: Lillian Guevara-Castro
Reviewed by: Adam West
Key Takeaways
- Federal Housing Finance Agency director Bill Pulte knocked the pricing of FICO's model, casting doubts on its future dominance.
- Players like Plaid are advancing new models that prioritize cash flow and rental data over credit history.
- Congress and advocates for consumers are supporting bills expanding the data included in credit scores.
Federal Housing Finance Agency Director Bill Pulte’s public criticism of FICO’s escalating pricing model has set off industrywide speculation regarding the credit giant’s influence in the future of mortgage lending.
The director of Fannie Mae and Freddie Mac said on CNBC last week that he “had never heard so many people being upset with FICO.”
Pulte, who essentially holds the reins to the U.S. mortgage market, objected to the way FICO charges lenders and the indirect impact that the expense could impose on borrowers, and especially on the first-time homebuyer.
The idea that antiquated scoring systems are putting additional pressure on borrowers has hit a nerve in Washington as affordability is already being stretched. That signals increased eagerness among federal authorities to rethink the way credit is being gauged.
If Fannie Mae and Freddie Mac begin seeking financing options elsewhere, the beginning of a significant change could be underway.
FICO Scores, which has a range between 300 and 850, has been the foundation of credit assessment since the late 1950s. Lenders have used the FICO formula, based primarily on payment history and debt levels, for decades to approve loans and set prices.
But according to PYMNTS, the model has consistently excluded large groups of consumers — most importantly, people lacking a long and traditional credit history.
The Cost of Exclusion
Recent PYMNTS Intelligence reveals that an estimated 80 million Americans — based on survey extrapolations — were credit marginalized, meaning they were rejected at least once for credit in the past year, or credit avoidant, consumers who’ve opted out of credit entirely.
And almost 17 million individuals have abandoned credit altogether.
Pulte’s comments come as shares of FICO have been volatile amid growing interest in alternative models. If Fannie and Freddie even start experimenting with alternative platforms, the door could open to the competition. And there has already been movement in the space.
As PYMNTS reports, Plaid has launched a consumer-permissioned cash flow solution that is intended to help lenders determine borrower creditworthiness irrespective of the system of FICO. Plaid now functions as a consumer reporting agency, a strategic position that puts it directly in competition with traditional credit scorers.
Rethinking What Counts
Alternative data is turning the story around. Rather than only rewarding individuals with deep debt histories, new methods examine rental payments, income streams, and even bank-level cash flow data to analyze a borrower’s repayment capacity.
That strategy has the ability to bring millions of “thin-file” consumers into the credit mainstream.
Legislative momentum is gathering, too. The Credit Access and Inclusion Act, sponsored by a host of members of Congress, would allow utility and telecom companies to report timely payments to the credit bureaus.
New approval strategies involving alternative data can increase access and allow lenders to better analyze repayment capacity.
TransUnion has already seen encouraging results. In 2021, it included rent payment information that allowed nearly 9% of formerly unscorable individuals to enter the ranks of people with credit histories, with many falling into the near-prime tier.
Open banking platforms may help fast-forward this evolution. As consumers give lenders access to view their actual financial activity in real time, underwriting is more tailored and less formula-based. That doesn’t necessarily mean the demise of FICO, but its monopoly is lessened.
What’s Coming Next
Regardless of Pulte’s statement, change is not certain, but the stakes are now higher. When industry titans like Freddie Mac and Fannie Mae make even a partial adjustment to their risk assessment methodologies, the industry follows.
Lenders, fintechs, and policymakers will be compelled to reconsider which tools provide the optimal balance of precision and fairness.
The era of the one-size-fits-all credit score is in jeopardy. Millions of Americans left in limbo are eager for the change.
