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The Federal Housing Finance Agency's recent decision to allow government-backed mortgage lenders to use alternative credit reports on mortgage applications had a dramatically negative impact on Fair Isaac Corp. (NYSE:FICO) stock.

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FICO has enjoyed a virtual monopoly in U.S. mortgage lending for decades because Fannie Mae and Freddie Mac  were only authorized to use FICO reports when processing mortgage applications. Your FICO score and payment history are the two main pieces of information that credit reporting agencies Equifax (NYSE: EFX), Experian and TransUnion (NYSE: TRU) furnish to lenders when you apply for a mortgage.

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FICO shares closed at $1,869 on July 7. The share price plunged to $1,565 after the FHFA announced its policy shift on the following day. Since then, FICO shares continued trending sharply downward before hitting a year-low of $1,471 on July 15. The price has recently rebounded slightly to the low $1,500 range.

FICO creates an algorithm that determines your credit score and then sells that information to the credit reporting agencies. This is why you pay for credit reports when applying for mortgages. However, the costs associated with paying for credit reports have been rising for homebuyers.

That's complicated by the fact that today's borrowers may apply for mortgages with multiple banks to get the lowest interest rate. However, each lender charges a separate application fee for the credit report. These application fees can be as high as $50, which means it could cost buyers hundreds of dollars just to compare different loan terms.

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These fees can be a significant barrier to prospective borrowers. That's part of why the Consumer Financial Protection Bureau launched an investigation into what it calls "junk fees" in the homebuying process in May 2024. The CFPB cited the rising cost of credit reporting fees as an area of focus of the probe. The Wall Street Journal reports that the fee FICO charges reporting agencies for pulling reports has jumped from $0.60 in 2018 to $4.95 today.

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"The market for credit scores has long been dominated by one company's algorithm: the Fair Isaac Corporation, which sells the FICO score," said then-CFPB Chair Rohit Chopra in a 2024 speech to the Mortgage Bankers Association. "Mortgage lenders have shared that costs for credit reports and scores have increased, sometimes by 400% since 2022." That could be about to change because of the FHFA's decision allowing lenders to use VantageScore.

That announcement clears the way for Fannie Mae and Freddie Mac to use a different type of credit score, known as the VantageScore. This system can benefit consumers because it also factors in on-time rent payments into an applicant's credit score. By contrast, FICO scores were mainly calculated by using the applicant's payment history with their creditors.

The VantageScore system was formulated by FICO's customers Experian, Equifax and TransUnion. Both algorithms will award scores between 300 and 850. The higher an applicant scores on the scale, the more likely it is that their loan application will be approved. It also goes a long way towards determining what interest rate the borrower will pay. Applicants with higher scores are perceived as better credit risks and get lower interest rates as a result.

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Many would-be borrowers and loan applicants have long complained that the FICO scoring system did not factor their rent payments into the scoring equation. This is particularly ironic because monthly rent, like a mortgage, would be the borrower's single biggest expense. The idea of a scoring system that didn't give borrowers credit for on-time rent payments has never seemed completely logical.

There is still doubt among lending professionals, like TD Cowen housing policy analyst Jaret Seiberg, about whether the use of VantageScores will replace the traditional FICO scoring for Fannie Mae and Freddie Mac. The Journal cited a research note from Seiberg saying, "This is a win for VantageScore, but we don't see it as an immediate risk to FICO."

FICO shareholders will certainly be hoping that Seiberg's analysis is correct. If he's right, FICO's stock could eventually reverse its downward momentum and recover. On the other hand, FICO stock may face more losses if VantageScore takes hold with major lenders and becomes a major player in the mortgage industry.

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This article FICO Stock Has Plunged By Over 20% Since White House Announced Decision Allowing Mortgage Lenders To Use Alternative Credit Reports originally appeared on Benzinga.com

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