It’s summer in America and house hunting season is in full bloom. Mortgage rates are high, as are home prices. And the longer-term economic outlook remains uncertain.
Even with these challenges, the housing market is robust and continues to be an important driver of the U.S. economy. With a surfeit of inventory and a slow sales cycle, the American dream of home ownership is alive and well.
Yet for many Americans it may be a dream deferred or derailed altogether due to just one factor: Fair Isaacs Corporation.
Known broadly by its acronym, FICO wields more power over the average American household than most governmental agencies. But unlike elected officials, FICO and its opaque algorithm are accountable to no one but its shareholders — not policymakers, not lenders, and certainly not the consumers from whom it derives its very reason for being.
From mortgages and rents to credit cards, auto loans and even job applications, FICO’s credit scoring can make or break your future. The lower your number, the likelier you are to be on the losing side of the FICO curve. Its system dominates the very metrics of creditworthiness that banks and financial institutions rely on to determine who gets what and at what price. Your credit score can determine the cost of a mortgage, the interest rate on your credit card or whether you can even rent an apartment.
In essence, a single company, hidden from public view, effectively dictates who gets a home, who gets a car, and who gets the opportunity to build wealth. To say FICO is a monopoly fails to convey its outsized impact on society: Its algorithmic decisions can obstruct opportunity and entrench inequality for millions of deserving Americans.
Instead of expanding access to credit, FICO functions much like a modern-day gatekeeper, and as such, it effectively reinforces the deep financial divides in today’s society. But FICO’s power extends far beyond financial services. It also shapes the job market by influencing background checks and employment decisions. It can dictate whether you are offered a job, a promotion, or a line of credit to start a small business.
In true monopoly form, FICO has an estimated 90 percent share of the credit scoring market. That leaves little room for competition or alternative scoring systems that might give underbanked consumers and those with thin credit histories a fair chance. Credit rating systems that take into account rental payments, utility bills and phone bills, for example, can be more egalitarian.
Today, there are no fewer than 10 cases against FICO, brought by banks, credit unions, mortgage lenders, real estate brokerages, auto dealers and others, alleging that FICO charges artificially inflated prices for its scores. The company’s business practices also caught the attention of Republican Sen. Josh Hawley last year, no doubt because many of his Missouri constituents have likely fallen victim to FICO’s scoring.
In a scathing letter to the Department of Justice, Hawley wrote called FICO “a for-profit company operated under a sweetheart deal from the federal government.” He noted that it is used for decisions on federal programs, such as Federal Housing Administration and Department of Veterans Affairs home loans.
“This means that most home buyers are forced to obtain their mortgage from a lender who uses FICO’s services,” Hawley wrote. “It is the only real competitor in the space.”
Hawley also noted that FICO is increasing the price to access its scores by 500 percent over the last two years, even as “FICO’s stock price has more than doubled.” Hawley asked for the Justice Department’s antitrust division to investigate FICO.
In its own defense, FICO claims that its dominance is the result of its own brilliance. It recently announced it would include another metric designed to be more inclusive of positive data for many Americans by including the history of buy-now, pay-later accounts.
But FICO won its monopoly power in no small part due to the federal government. Federal agencies like the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, established FICO’s scores as the de facto standard for credit reporting by adopting and often requiring its use.
There are other credit companies in the market that provide alternative models for credit review and reporting, and who deserve to participate in the credit risk industry. Congress should clear away regulatory impediments to their use and full participation.
At a time when the housing market is challenged, American consumers need all the help they can get. While Congress cannot control interest rates, it can at least make credit review and reporting fairer than FICO for millions of aspiring homeowners, job-seekers and business owners.
Adonis Hoffman writes on business, law and policy. He served in senior legal roles at the FCC and in the U.S. House of Representatives.
