FICO and the Credit Bureau Cartel

Twenty or so years ago Experian and FairIsaac were paid by USAID to help build credit bureau infrastructure in Kazakhstan. USAID also paid their legal departments to help draft a law which would govern the whole process. And guess what, in the result we got much fairer, more efficient, far more future-proof infra than the US has today.

Gov licenses credit bureaus and runs its own one. Banks must report to all licensed bureaus and may choose which bureau to pull reports from. This means a report from any bureau is as good as from any other one.

Having a gov player in the market effectively creates a price ceiling, so a private bureau has to sell data for less than the government-run bureau. Private bureau has to keep innovating to justify its existence and thus keep creating new products which predict creditworthiness better and better. Credit report includes all the raw information, so banks are free to compute their own score and are not bound to anything stupidly archaic and awkward such as US FICO score, don't need to rely on any external score at all. It is the XXI century, computing a credit decision out of a few hundred datapoints takes milliseconds, costs nothing. So gov-run bureau sees a fraction of a % of the load yet effectively moderates the whole market. The largest private bureau is owned by banks (like VISA used to be) and thus is working in the best interests of the banks.

Many (if not all) problems we see in the US financial sector are the result of regulatory and legislative negligence. Just some lazy folks trying to run things the way there were in the 80es.

> Even if a lender thinks the customer would be a good risk, the lender has to buy a FICO score regardless.

This isn't completely correct. For a period I had no FICO score, yet I was able to secure a loan from a Credit Union. It did require me to show my assets and income flow, but the Credit Union was able to provide me with a loan.

The score from what I have gathered when I learn really rewards those who remain in debt and pay substantial interest, not the frugal and financially stable (check to check is not financially stable). Basically encouraging to keep self in debt just at the edge of financial disaster's precipice.

> ... FICO prohibits not only validating different models against FICO scores, but even displaying FICO scores next to non-FICO scores. ...

> ... all three bureaus plus FICO have massive pricing power.

> ... come to a set of arrangements to jointly hike prices

This cartel will never be broken up. Too much money goes into the politicians pockets to move for break-up.

I would point out that "400% increase in mortgage credit check fees" sounds probably a lot worse than the actual number - which is like.. $150 at the time you are getting a mortgage. Of all the fees associated with buying your average $400k home, I don't think the $150 credit check fee is the big pain point.

Title insurance is a much bigger scam/cost. The various state & local taxes at closing are orders of magnitude higher. Not to mention brokers fees (which are somewhat being handled as of late).

There is an interesting dynamic here, one government agency, the FHFA, dictates that mortgage brokers have to use FICO and all three major credit bureaus, explicitly granting these companies a government enforced monopoly. Another government agency with different goals, the CFPB, comes in and complains about the price these government granted monopolies are charging and proposes regulation to limit it.

These dueling agencies may eventually find a balance, with the FHFA dictating which companies services have to be used and the CFPB dictating how much those services can charge...

The whole thing is a failure not of free markets but of different government regulators not coordinating their regulations.

I'm not sure how many times we're going to re-learn this lesson:

* You cannot regulate a monopoly into good behavior. Recent example: Apple.

* You must destroy it.

All of these regulatory bureaus are a waste of time. Let the FTC loose like a Mantura.

If you think this is a "capitalists being evil" problem and not an "regulators over-regulating" problem, you should pay particular attention to fragments of the article:

> It’s not that hard to come up with a model for underwriting that is reasonably accurate; any bank with scale could probably do it. But FICO uses trade secrets, copyright, patents, or restrictive contracts to block anyone from doing so.

> First, the government guarantees most mortgages through Fannie Mae and Freddie Mac [...]. This complex process relies on a standard to price the loans, and that standard is FICO,

> A few years ago, the Federal Housing Finance Agency (FHFA), which runs most housing finance for the government through its control of secondary mortgage buyers Fannie Mae and Freddie Mac, decided that it might want to create some competition for FICO. So it turned to VantageScore. Only, it got backlash from Wall Street, which didn’t want to bother changing their models for mortgage backed securities. Instead of allowing mortgage lenders to pick either FICO or VantageScore, FHFA simply required that lenders use both.

In short, the federal government essentially requires everybody to use the services of one specific private company. This company can raise prices not because it's anticompetitive, but because the government doesn't allow it to have any competition.

Perhaps, instead of trying to pass even more regulation, that government should just relax its restrictions and allow other participants on the market to compete fairly?

seems like a startup opportunity - start with a well-defined subset of consumers where you can beat FICO in accuracy, then expand out. Don't compete on price, win on detail and quality.

Lenders have to request a credit score from one of these agencies, because that's what Fannie Mae and Freddie Mac require.

This is about regulatory capture, which is of course entirely within the control of the regulators, and very indirectly by voters at the ballot box. We continue to vote for politician who allow this to continue.

We can't be taken advantage of without our (collective) permission. Let's vote for some folks that remove the regulatory capture and free up lenders (really loan originators, of which there are a great many) to compete for borrowers by (in some cases) dispensing with the credit score and other items.

> In other words, national credit reports are foundational to modern American society, binding us to one another financially as a nation through a network of computerized records. And that national market of identity is relatively new. Until 1970, credit reporting was localized, mostly through coops of town bankers who hired detectives to investigate borrowers, collecting gossip from snitches about who drank too much, who was a Communist, who slept around, and so forth.

: Wait, it's all social credit?

: Always has been.

The ridiculous thing is that the FICO score is so focused on commercial profitability rather than risk. You get lower score if you as a consumer optimise your cost of credit, price shopping/taking advantage of new rates/offers… it’s really a credit and likely profitability score

Looks like most people commenting didn’t read the article.

I wonder if open source software can play a role in this. Maybe we can have an open source algorithm for determining credit ratings and private companies only provide a secure database of ratings.

It will also offer the lay person insights into how the credit rating is exactly determined. They can know what is causing their rating to be less than desired and take appropriate action, instead of watching a random youtube video titled "5 ways to quickly improve your credit score".