Shares of FICO, the company behind your credit score, are plunging after a White House announcement

CNN
 — 

Mortgage lenders will soon have a new way to assess borrowers applying for government-backed loans. That sent the stock of America’s biggest credit score company plunging Tuesday.

Federal Housing Finance Agency director Bill Pulte announced that lenders may start using VantageScore, a rival to the Fair Isaac Corporation, the company behind the widely recognized FICO score, to assess creditworthiness for government-sponsored Fannie Mae or Freddie Mac mortgages.

“Effective today, to increase competition to the Credit Score Ecosystem and consistent with President Trump’s landslide mandate to lower costs, Fannie and Freddie will ALLOW lenders to use Vantage 4.0 Score with no current requirement to build new infrastructure,” Pulte wrote in a Tuesday social media post.

Pulte said that Tuesday’s announcement would expand credit access and bring down closing costs.

The announcement comes as FICO’s credit check fees have reportedly surged in recent years. Shares of FICO (FICO), VantageScore’s biggest rival, tumbled more than 17% Tuesday afternoon following the news.

For decades, FICO has dominated the mortgage market, with Fannie Mae and Freddie Mac accepting only FICO scores. But in recent years, VantageScore, created in 2006 by the three major credit bureaus (Equifax, Experian and TransUnion) as a FICO competitor, has gained traction.

Before Tuesday’s announcement, mortgage lenders were already beginning to use VantageScore. In 2022, during President Joe Biden’s administration, the FHFA announced that after a multi-year transition period, lenders would be required to deliver mortgage loans with scores from both FICO and VantageScore to ensure that a person’s creditworthiness was properly vetted.

Last year, the Consumer Financial Protection Bureau announced a public inquiry into “junk fees” that increase mortgage closing costs, specifically mentioning the recent rise in the cost of obtaining a credit report.

“The market for credit scores has long been dominated by one company’s algorithm: the Fair Isaac Corporation, which sells the FICO score,” former CFPB chairman Rohit Chopra said last year in a speech to the Mortgage Bankers Association. “Mortgage lenders have shared that costs for credit reports and scores have increased, sometimes by 400% since 2022.”

In May, Pulte first posted on social media about the increase in credit reports, writing: “Why do some credit reports cost double (Biden’s term) from what they did during President Trump’s first term?”

Both FICO and VantageScore issue a credit score between 300 and 850 to potential borrowers with the goal of predicting the likelihood that a person will fall behind on debt repayments. A higher score means you’re less likely to miss a payment, but the two companies have differing methodologies to arrive at that score.

In a separate social media post, Pulte said Tuesday’s directive will enable Americans to use their rent to qualify for a mortgage, rather than relying solely on credit history based on credit cards and loans.

Unlike FICO, VantageScore does take rent payments into account if those payments are reported to Equifax, Experian and TransUnion, according to VantageScore’s website.

Despite the drop in FICO’s stock on Tuesday, the threat to FICO’s market dominance might be limited, said Jaret Seiberg, a housing policy analyst at TD Cowen.

“We have trouble seeing lenders abandoning FICO just because they are now able to use Vantage Score,” Seiberg wrote in a note to clients Tuesday. “This is because lenders have very little experience using Vantage Score when it comes to mortgages.”