Credit score prices to rise as much as 400% in 2023

Prices for FICO-issued mortgage credit scores for most in the lending industry will be increasing by 400% in 2023 — but the costs aren’t rising as much for a small select group.

According to a memo from the National Consumer Reporting Association obtained by National Mortgage News, FICO intends to group its customers into three tiers. Tier 1 consists of 46 lenders that will receive an increase of less than 10%, while the second tier is made up of six lenders, whose price for a credit score will increase by 200%. Every other originator is in the third tier and this group will see its prices rise by 400%.

The list is not being made public. However, the tiers are primarily volume-based; for some it is the overall amount of business generated.

FICO has a tiered pricing structure for providing credit reports to other lending segments, but until now had been charging a royalty of approximately 60 cents per score to all mortgage lenders no matter their size, a statement from the company said. The credit reporting agencies were notified on Sept. 1 about this change.

“With this royalty increase, FICO will now collect approximately 60 cents to approximately $2.75 per FICO Score,” the FICO statement said. “That means FICO will collect approximately $2-to-$8 total for all three scores out of a $40 to $50 (or more) tri-merge report and score bundle, and out of an average $3,800 in closing costs.” Any increase to the cost for the first tier is a result of inflation.

This means the total increase for any tri-merge report is no more than $6 for most lenders; any higher costs are from charges being added by others, the FICO statement said.

“FICO’s royalty for the highest volume tier will remain at the current level, apart from a customary adjustment to account for inflation,” the statement noted. “The royalty for lower-volume tiers will increase, although this will be only the second increase in FICO’s 25-plus year history (apart from nominal adjustments to account for inflation over the last few years) of providing credit scores to the mortgage market.”

At that additional cost of between $2 and $8, it is not an impediment to homeownership, FICO said.

National Mortgage News also reached out to the credit bureaus.

“Beginning in December 2022, consistent with other markets such as auto loans, credit cards and personal loans, and based on changes in pricing from our third-party supplier, FICO scores will be priced at a tier-based pricing structure for mortgage,” a statement from an Equifax spokesperson said. “As a result of this change, Equifax recently informed customers that on Jan. 1, 2023, Equifax will move mortgage industry pricing to this tier-level structure. The new tiered pricing structure to the bureaus is tied to the entire mortgage industry.”

Experian and TransUnion have not yet responded to a request for comment.

But credit scores can be generated multiple times during the mortgage application — and even pre-application — process. Those higher costs are likely to be passed on to the consumer, especially at a time when nonbank mortgage originators are manufacturing loans at a financial loss. On average, lenders lost $624 per loan during the third quarter, following a second quarter loss of $82 per loan, the Mortgage Bankers Association found.

For some classes of borrowers, even marginally higher costs could affect their ability to obtain a loan.

“The Community Home Lenders of America are disappointed in the new pricing model that was released as well as the lack of transparency around the pricing model and the complete lack of communication with the industry about changes to pricing and how they would be derived,” said Taylor Stork, president of the Community Home Lenders of America. “There was very little consideration to how this would impact the end borrower.”

Community-based nonbank lenders generate the largest share of loans for underserved borrowers and produce most government-guaranteed mortgages.

“Borrowers that obtain their financing through community focused lenders like our members, those borrowers are going to be adversely impacted by these changes,” said Stork, who is also the executive vice president and chief operating officer of Developer’s Mortgage, Huntingdon Valley, Pennsylvania. “Most of those IMBs are not on this list of companies receiving special treatment.”

Ironically, FICO’s pricing increase comes weeks after Federal Housing Finance Agency Director Sandra Thompson announced the replacement of the Classic FICO model used by the Fannie Mae and Freddie Mac automated underwriting systems with the updated FICO 10T model, as well as a competitor’s template, VantageScore 4.0. VantageScore Solutions was created by the three credit reporting bureau; it declined to comment.

Part of the FHFA’s change reduced the number of required scores used in a decision from three to two.

“MBA is monitoring the situation and recognizes that there will be added costs to lenders that will likely be passed on to consumers at a time of ongoing affordability challenges,” a statement from the organization said.

FICO added in its statement that scores are a low percentage of what a tri-merge report costs.

“FICO Scores are well understood, and provide a proven, cost-effective way for lenders to evaluate a consumer’s risk of default,” its statement said. “For these reasons, we are generally moving to a volume-based royalty approach, designed to more closely align to the considerable value FICO Scores bring to the origination process in the mortgage market.”