The Consumer Data Industry Association (CDIA) – the trade group representing the three major credit reporting agencies – recently released a blog post that argues for the continuation of the government-granted rents that their members collect on every mortgage transaction and opposing the idea that individual credit report providers should be subject to market competition. MBA’s lender members are accustomed to innovating and competing for business in a heavily regulated environment. As I said in a post last week, this informs our view that it is time to end the tri-merge and move to a single-file reporting structure for certain loans.

Let’s have accurate data.

CDIA’s response harps on incomplete data as being a problem. Unfortunately, it is hard to have a full public conversation about the efficacy of the tri-merge versus other regimes because the credit reporting and scoring companies lock users and resellers into very stringent non-disclosure agreements that prohibit comparing the performance of different bureaus and scores or disclosing the contents of the reports at an aggregate, anonymized level. We share CDIA’s view that “accurate data protects everyone,” but we reject the view that it takes buying reports from all three bureaus to get sufficient data to underwrite and price a mortgage. We call on the credit data industry to release firms from these agreements so that they can publicly disclose relative performance, the materiality of any data gaps, and other granular information that would be relevant. 

Our members have looked at their own data, and while they can’t share the details, they have shared their conclusions regarding data coverage on the trade lines that matter most and the resulting credit scores. They are confident that, with appropriate guardrails and business rules, we can have safe and sustainable mortgage lending based on a single credit report. We would love to go even further into the details. As mortgage lenders, every application we take is subject to public disclosure through Home Mortgage Disclosure Act (HMDA) reporting, so we aren’t afraid of transparency. We’ll see whether the credit bureaus are.

MBA has already asked the Federal Housing Finance Agency and Fannie Mae and Freddie Mac (the GSEs) to refresh their analysis of single, bi-, and tri-merge with new data and then release those results so we can have this debate with the benefit of more complete information and the ability to separate the material differences from cherry-picked “edge cases” or selective statistics. And it is not lost on us that FHFA determined THREE YEARS AND THREE MONTHS AGO that tri-merge credit reports were not necessary for any GSE loan when it announced the approval of the bi-merge regime.

Finally, we believe that competition and transparency together will improve the quality and accuracy of data from each of the three bureaus.

FICO has a government-derived monopoly. But so do the credit bureaus.

CDIA’s response suggests that FICO is the reason that prices are higher. A correct statement would be that FICO AND the credit bureaus are responsible. Put simply, the credit bureaus have maintained a percentage mark-up on the FICO score that they have refused to change. While competition is good in the score space—and we support score competition—it is foolish to pretend that the credit bureaus have no agency with respect to the margins they charge on the score.

It is also telling that we are hearing reports that the bureaus have increased the costs of credit reports and added ancillary fees this year, when FICO sought to disintermediate the bureaus by instituting a direct licensing program — that is, when the score could be purchased directly from FICO through its direct licensing program without a mark-up going to the credit bureaus.

Is the credit bureaus’ data really that bad that using one report or score would lead to another financial crisis?

We have more confidence in the credit reporting industry than to believe inflammatory rhetoric that requiring the bureaus to stand on their own feet and compete for business on the basis of completeness, predictiveness, and accuracy would result in a meltdown of the mortgage market. After all, they compete in other market sectors with standalone reports. We also are compelled to note: the Great Financial Crisis occurred…with the tri-merge mandate in place at the GSEs and FHA. 

Why would using a single bureau be more discriminatory than tri-merge?

It is also not clear why using one credit report would result in discriminatory outcomes, as CDIA alleges. This would be very concerning, if it were accurate, as again they compete as standalone reporters in other market sectors. The credit bureaus should ensure that each of their models and data collection practices is non-discriminatory and fair individually, rather than hiding in a bundled tri-merge to impute such problems to “the other guys.”

It remains frustrating that the continued refrain from the credit reporting industry is “our product is too unreliable and incomplete to be relied on in the mortgage market.” 

Why don’t lenders charge borrowers for credit reports?

CDIA unhelpfully suggests that lenders should simply pass through the rising costs imposed by the bureaus to each individual applicant and borrower. The lending space is highly competitive, and borrowers have choice—unlike the government-mandated oligopoly conferred on the credit bureaus. This results in business practices that encourage consumer choice, robust competition, and natural price pressure on margins.

This is illustrated by the fact that the credit bureaus are steadily reporting increasing revenues in their mortgage verticals year-over-year at a time when mortgage origination unit volumes are at the lowest levels since the mid-1990s.Our data shows the margin compression for lenders that one would expect from such a competitive market, and while credit costs are not the only issue, they certainly do impose a large systemic cost borne by borrowers.

In conclusion, let’s have competition for scores and reports.

A business model that implies “none of us have good enough data to underwrite a mortgage, so you must buy from each of us” is unacceptable. And in fact, it sells the bureaus short – in every other consumer credit market, most lenders choose to use a single file report. CDIA has tried to instill fear into this debate. The debate is not about risk; it’s about whether the government should continue to allow three companies to extract monopolistic profits from mortgage applicants. 

Perhaps I have more confidence in the credit bureaus than they do in themselves, but I believe if they were forced to compete for business in the mortgage market, they would rise to the challenge. The parade of horribles is over-exaggerated to begin with, and one would think they would be mitigated by improvements as the bureaus sought out the most relevant and predictive data sources and refined their reporting practices.

 A good first step would be allowing a fulsome conversation. The credit data industry should release users from any restrictive agreements that forbid aggregate-level and anonymized discussions of predictiveness and completeness so that we can see if the threats are as significant as CDIA alleges.

More to come.

I will have a lot more to say about this from the stage at MBA’s Independent Mortgage Banker Conference this Monday afternoon in Florida – you won’t want to miss that.