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Unsolved mystery: FICO and CFPB

By Janna Herron · Bankrate.com
Wednesday, August 15, 2012
Posted: 5 pm ET

You may remember that the Consumer Financial Protection Bureau, the federal consumer watchdog, last month defined the larger participants of the credit reporting industry that it would oversee. Of course, this meant Experian, Equifax and TransUnion.

But the definition provided by the Consumer Financial Protection Bureau left room for interpretation, specifically when it came to FICO, the creator of the most commonly used credit score. The CFPB included analyzers of credit reports as part of the industry, and those analyzers could provide credit scoring services or products.

At the time, FICO wasn't sure if the CFPB was fingering them for supervision. And the CFPB wouldn't tell. (It continues to stay mum about naming specific companies.)

I spoke with FICO not long ago to see if the company's lawyers had figured out its status with the CFPB. It turns out the waters are still murky.

" ... It isn’t yet clear to us how the Bureau intends to oversee our company’s compliance with federal consumer financial laws," company spokesman Anthony Sprauve wrote in an email. "I’m sure this will become clearer as we continue to work cooperatively with the staff of the CFPB."

However, FICO did add the following language for shareholders in its quarterly filing under a list of "Risks Related to Our Business" (italics mine):

"Financial regulatory reform stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act and the many regulations mandated by that Act, including regulations issued by, and the supervisory authority of, the Bureau of Consumer Financial Protection ("CFPB")." ...

The italicized part didn't appear in the company's previous four quarterly statements and last annual statement.

"I think FICO is keeping its ears and eyes open and is prepared for the CFPB to talk to them," said Manav Patnaik, vice president of equity research at Barclays who covers the company's stock. He did add that he thinks the CFPB's sights are set on the big three credit bureaus.

Attorneys at the National Consumer Law Center also believe that FICO falls under the bureau's purview. In fact, Lauren Saunders and Chi Chi Wu of the NCLC were the only ones to mention FICO when they submitted their comments on the CFPB's initial proposal announced in February.

"It would be ludicrous not to cover FICO given the company's large impact on the credit scoring market," Saunders wrote to me in an email following the final ruling.

She hopes the oversight of FICO, along with the big three credit reporting bureaus, will lead to "greater accuracy in reports and scores, better information to consumers about how their reports and scores are being used and what can affect them, and better accountability for inaccuracies."

Perhaps a little oversight will make consumers feel like FICO scores are fair. In a recent survey, Synergistics Research found that more than 2 out of 5 consumers who were turned down for credit based on FICO scores felt the decision was somewhat to very unfair. (A little more than half found it somewhat to very fair, while 3 percent didn't know.)

Part of the distrust surrounds FICO's mysterious formula that calculates these credit scores. Of course, this is proprietary and patented information that, if made public, would threaten FICO's dominance in the credit scoring industry. But it only seems appropriate that a company that develops a product that is widely used in credit decisions has someone looking over its shoulder. If the CFPB takes on that role, it would be the first federal oversight for FICO ever, according to Patnaik.

If FICO is under the CFPB's watch, what kind of action would you like the CFPB to take?

Follow me on Twitter: @JannaHerron.

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