Mortgage group asks regulators to stop FICO’s price hikes of up to 400%

Credit reports are getting a lot pricier, and some mortgage lenders are none too pleased about it.

In a letter dated Nov. 22, the National Consumer Reporting Agency told its members that the “vast majority” of mortgage lenders would see price increases between 10% and 400% from Fair Isaac Corp. (FICO).

The letter, signed by NCRA Executive Director Terry Clemans, said there would be “a wholesale price increase of less than 10% for the top tier of approximately 46 lenders, about 200% for approximately 6 lenders in the middle tier, and more than 400% for all other mortgage lenders in the nation.”

“A pricing scheme where a few lenders receive small price increases, while prices are quadruped for most lenders (and the borrowers they serve) is arbitrary and raises questions about whether it is a proxy for volume discounts or done for other unjustifiable reasons,” the Community Home Lenders of America, which represents small and mid-sized lenders, wrote in a letter to Federal Housing Finance Agency Director Sandra Thompson and Federal Housing Administration Commissioner Julia Gordon.

The trade organization called on Thompson and Gordon to stop the price hikes, which it described as a violation of “basic principles of transparency.”

FICO’s explanation

In a statement to HousingWire on Wednesday, FICO said that by Sept. 1 it informed the three credit rating agencies that it had adopted a tier-based royalty structure for mortgage, generally based on the volume of FICO scores delivered to lenders.

Such a royalty structure was already in place for auto loans, credit cards, personal loans, and other products, but FICO has historically charged each CRA the exact same royalty per-score in the mortgage market. Before this change, FICO said the royalty per score has been approximately 60 cents, the company said.

With the new royalty system, “FICO will now collect approximately 60 cents to approximately $2.75 per FICO Score,” the company said in a statement. “That means FICO will collect approximately $2-8 total for all three scores out of a $40 to $50 (or more) tri-merge report and score bundle, and out of an average $3,800 in closing costs. All amounts for the tri-merge report and score bundle above this $2-8 are collected by others. Accordingly, the total FICO increase for any given tri-merge report this year is no more than approximately $6, and for many, less.”

The company said its pricing remains “exceedingly low compared to the value that the FICO Score provides as one of the most important components in facilitating approximately $2 trillion in mortgage originations every year, and disproportionately low when compared to its royalty rates for other markets.”

FICO said its royalty for the highest volume tier – it did not disclose which lenders were in that tier – will remain at the current level, apart from an adjustment to account for inflation.

“The royalty for lower-volume tiers will increase, although this will be only the second increase in FICO’s 25+ year history (apart from nominal adjustments to account for inflation over the last few years) of providing credit scores to the mortgage market,” FICO said in the statement.

Because mortgage lenders and brokers typically pay for credit reports upfront and are often stuck with the bill if the loan is denied or canceled, such a policy will likely have an outsized impact on smaller lenders. (Lenders are permitted to charge borrowers upfront for credit reports, but most do not.)

Hikes on smaller lenders are “unjustified,” CHLA argues

In its letter, the CHLA argued that a “pricing scheme where a few lenders receive small price increases, while prices are quadruped for most lenders (and the borrowers they serve) is arbitrary and raises questions about whether it is a proxy for volume discounts or done for other unjustifiable reasons.”

Such a pricing structure arguably creates discriminatory pricing against minorities and underserved borrowers who are more likely to apply for FHA loans, the CHLA said.

“While we don’t know who the 52 preferential lenders are, our impression is that smaller IMBs (and smaller banks) are generally excluded from this category, and therefore the underserved borrowers they serve will be significantly and adversely affected,” the trade group wrote in its letter.

For agency-eligible loan applications, the CHLA said the price hikes violate “the spirit of the FHFA’s G fee parity policy, disproportionately harming smaller lenders and their borrowers.

Last month, the FHFA approved VantageScore as another credit scoring system for mortgage originators, giving FICO its first actual competitor in decades. The regulator, however, said it would be a “multiyear” effort to get VantageScore 4.0 up and running.