Fair Isaac Corp.’s shares surged in Thursday morning trading after the US data analytics company said it would license its credit scores directly to mortgage resellers, raising concerns of margin pressure for major credit bureaus.
Shares of Experian, Equifax and TransUnion tumbled on fears that the move could curtail the intermediary role of the credit reporting companies.
FICO score, created by Fair Isaac, is a US credit scoring system used by nearly 90% of lenders to evaluate a borrower’s creditworthiness.
The higher the number, the lower the risk of default.
Fair Isaac said direct access to FICO scores for lenders and mortgage resellers would increase competition and bring price transparency.
“This new distribution model will allow lenders to avoid paying the current about 100% markup the credit bureaus currently charge for the FICO score,” analysts at brokerage Raymond James said.
Fair Isaac’s latest move was lauded by Federal Housing Finance Agency Director Bill Pulte, who said in a post on social media platform X that the company has generated “creative solutions” to help the American consumer.
Pulte had earlier this year criticized the company over its pricing as he pushed to broaden the use of rival scoring models in mortgage lending.
Following his comment, FICO shares extended gains and was last up 26%. If the gains hold, it would erase all the losses for the year.
Citigroup analysts said direct licensing would cut out the margin that companies such as Experian and Equifax make on the FICO credit score.
“Our initial reaction is this is negative for Experian and Equifax,” they wrote in a note.
Experian shares were down 4.8% in London. US-listed Equifax fell 7%, while TransUnion was last down 11%.
Experian, Equifax and the Consumer Data Industry Association did not immediately respond to requests for comment, while TransUnion declined to comment.
Industry shift
The stock had taken a hit when Pulte allowed lenders to use VantageScore for Fannie Mae and Freddie Mac mortgages.VantageScore, founded in 2006, is a joint venture between credit bureaus Equifax, Experian and TransUnion.
The agency’s decision introduced direct competition for FICO in the mortgage market, sparking doubts about its ability to continue increasing its prices.
“This is likely an FHFA-friendly outcome,” brokerage Needham said, and could help lift the “FHFA overhang” on the stock.
Fair Isaac said its direct mortgage score licensing plan would bring immediate cost savings to lenders, brokers and other industry participants, while noting that firms opting to work through the credit bureaus can continue to do so.
“This change eliminates unnecessary mark-ups on the FICO Score and puts pricing model choice in the hands of those who use FICO scores to drive mortgage decisions,” CEO Will Lansing said.
The change could intensify competition in the credit scoring business as it gives lenders more direct access to FICO scores.
“By introducing a licensing program for tri-merge resellers, FICO is effectively taking away the ability of the credit bureaus to mark up the FICO score,” Jefferies analysts said in a note.
The new model could hit credit bureau earnings by an average of 10% to 15%, it warned. “For the bureaus to take price, they will now have to directly negotiate with the lenders, as well as compete with each other.”
