Creditworthiness is fundamental to consumers’ access to housing, automobile loans, credit cards, and other financial opportunities. Yet many Americans have only a hazy grasp of how consumer credit data is collected, how that data is used to generate credit reports, and how they are used to produce a consumer “credit score,” or measure of their creditworthiness. It is not lost on consumers, however, that more competition in the market for credit scoring is likely to give them a better shot at obtaining credit.
Competition in the credit scoring market, and its role in fostering more choice and access to credit, should be a public policy imperative, especially during these troubled economic times. Until recently, the Fair Isaac Corporation (FICO) has dominated the credit scoring market in the U.S. In a commendable effort to inject competition, the Federal Housing Finance Agency (FHFA) — which plays a key role in regulatory oversight of home mortgage lending — recently approved the entry of VantageScore, a competitor to FICO.
Increased competition in credit scoring should benefit consumers. But the entry of VantageScore raises key questions about whether that competition will be fair. Namely, the three major credit reporting agencies (CRAs) — Experian, Equifax, and TransUnion — own VantageScore. This vertical integration means that the CRAs/VantageScore exclusively control the consumer credit data needed by its closest rival, FICO, and any future rivals, to generate credit scores. This positions the CRAs/VantageScore to potentially act on stronger incentives to steer business to VantageScore and away from competitors.
FHFA recognizes the harmful consequences of this scenario in the market for credit scoring. If it comes to pass, lenders and consumers would suffer through higher prices, less choice and variety, and slower innovation in credit scoring. Given the economic importance of the market, regulators, antitrust enforcers, and lawmakers should ask if this risk is acceptable. Introducing competition to challenge the dominance of an incumbent is good public policy. But swapping out a credit scoring market previously controlled by a single firm for one with two major players — one of which controls a critical input needed by competitors — is not a recipe for improved competition.
PPI’s analysis takes on this issue. It does a deep dive into the structure of the credit scoring market, the dynamics of competition, and regulatory oversight. The report concludes that preventing the vertical integration between the CRAs/VantageScore from undermining competition and choice in credit scoring is of paramount importance. PPI suggests a proactive competition policy approach that includes both regulatory and antitrust elements.
First, PPI recommends that Congress require FHFA to issue periodic reports on major competition metrics for the credit scoring market moving forward. Second, FHFA should solicit public comment on the development of alternative consumer credit data sources to break the data “bottleneck” controlled by the CRAs/VantageScore. Third, PPI calls for greater Congressional scrutiny of FHFA’s process for introducing competing scoring models. This includes FHFA’s apparent “slow-rolling” of the introduction of the newest FICO scoring model, FICO 10T. It also includes the agency’s proposals to reduce the number of credit reports needed for consumers to obtain financing. Both regulatory initiatives potentially undercut competition and the stability of the housing finance market.
Fourth, it is imperative that the U.S. Department of Justice (DOJ) be alert to potential anticompetitive conduct designed to frustrate access to credit reporting data. If warranted by evidence of consumer harm, antitrust remedies would include spinning off VantageScore from the CRAs. This could also be accomplished through Congressional action. Finally, the Federal Trade Commission (FTC) should initiate a study to establish a “baseline” for competition in credit scoring and to anticipate potential problems with the ongoing evolution of the market. This can be done under the FTC’s Section 6(b) authority.
