The FICO Monopoly
- Published on December 3, 2022
The National Mortgage News story about FICO’s plans to increase their fees is disturbing on multiple levels. The story reports that FICO plans to place lenders in one of three pricing categories. “Tier one consists of 46 lenders who will receive an increase of less than 10%, while the second tier is made up of six lenders, whose price for a credit score will increase by 200%.” And then the story drops the real playing field un leveling bombshell, “Every other originator is in the third tier and this group will see it’s prices rise by 400%”.
When I was CEO of the Mortgage Bankers Association I was an avid supporter of efforts to bring other scoring models, like Vantage Score, into the GSE’s and other mortgage programs. My efforts agitated the leadership at FICO to the point where they threatened to leave the MBA. When confronted with that I simply stated that the MBA advocates for what is best for the industry and does not pick sides based on who pays dues or how much they pay. Competition is good for the industry and that was my advocacy. It was a very effective business philosophy as it eliminated feeling unnecessary pressure by any individual lender or vendor. But my concerns then, look like they are coming true.
I operate under the view that monopolies, really any monopoly, are a bad thing. The problem with monopolies is that they have absolute pricing power and have the ability to behave as bullies. This is simply because they can. Since there is no alternative the choice to trade away simply does not exist. I recently wrote an article in Housingwire talking about a potential monopoly in the tech sector that concerned me for the same reason. FICO, it seems, is proving the point.
When I ran the single family business at Freddie Mac, pre conservatorship, both GSE’s had formed “alliances” with the nations largest lenders. Countrywide, Wells Fargo, Bank of America, Chase, and a few others all got special discounted g-fees and credit waivers in exchange for selling the majority of their business to one or the the other GSE. Thankfully in conservatorship the playing field was leveled. And while some disparities remain the g-fees are close to level meaning that the smallest seller is not disadvantaged in pricing power from the GSE’s compared to their largest. What FICO reportedly plans to do is a significant un leveling of the playing field, likely providing the biggest users with fee discounts. If passed through to the consumer, the impact is that borrowers will pay more going to smaller lenders. If not passed through smaller lenders will have to absorb the fee difference in a market where margins are tight enough.
I don’t know what policy makers will do here but it was good to see the Community Home Lenders openly state their disappointment. The MBA states that it is “monitoring” the situation but I hope that they call out volume pricing disparities by business model and size whenever it sees any un level of the playing field or if it may adversely impact consumers.
To be clear, FICO has the right to raise prices within reason, but to differentiate for volume is simply wrong and does not likely reflect the average cost to pull credit. The real challenge is that, as a monopoly that is enabled by the GSE’s and others, there is little option to those more adversely selected here.
Monopoly Game Board —Google Photos