Written By: Joel Palmer, Op-Ed Writer
Opinions vary as to whether Fannie Mae and Freddie Mac should require specific credit scoring models on mortgage applications or whether lenders should have more freedom on which scoring models they want to use.
At the direction of the Federal Housing Finance Agency (FHFA), Fannie and Freddie has assessed, over the past two years, the potential impact of updating credit score requirements. FHFA requested input through March 30 from interested parties.
Among the input sought by FHFA was a recommendation on which of four options should be used in the delivery of credit scores to the GSEs, mortgage underwriters and processors, and investors. Dozens of financial institutions, industry organizations, consumer advocacy groups, politicians and other stakeholders submitted opinions.
The options being debated involve use of one or both of the following credit scoring models:
FICO 9 scores, which were made available to consumers in 2016. FICO said this version disregards any collection accounts that have been paid in full, and it differentiates unpaid medical accounts in collections from non-medical debts.
VantageScore 3.0. The VantageScore model was introduced in 2006 and developed by the three nationally recognized credit reporting companies (CRCs), which are Equifax, Experian, and TransUnion.
The four options FHFA is considering include:
1. Requiring use of a single score on every loan, either FICO 9 or VantageScore 3.0.
2. Requiring use of both scores, if available, on every loan
3. Allowing lenders to deliver loans with either score, when available, with certain constraints such as using one score or the other for a defined period of time
4. Allowing delivery of multiple scores through a waterfall approach that would establish a primary credit score and secondary credit score
Below is a sample of the recommendations FHFA received from various stakeholders:
The Mortgage Bankers Association (MBA) did not recommend any of the four options. Instead, the association suggested that FHFA “undertake further analysis to better quantify any improvements to access to credit that new models would produce.” This analysis, MBA added, should “go beyond the current scope of the Enterprises’ empirical evaluations of Classic FICO, FICO 9, and VantageScore 3.0.”
The American Bankers Association (ABA), while noting that it does not endorse either FICO 9 or VantageScore, said that option 1 would be most desirable for its lenders, as it is “the most cost effective and simplest option.”
The Independent Community Bankers Association (ICBA) recommended Option 1. Furthermore, ICBA stated that FICO 9 is its preferred credit scoring model. “The shift to an entirely different score brings to bear higher transitional costs that disproportionately affect community banks without providing any real benefits for making the change. Additionally, ICBA believes that updating to the FICO 9 scoring model requirement would be easier to implement with minimal disruption for the Enterprises and the industry.”
National Association of Federally-Insured Credit Unions (NAFCU) pushed for the third option in its comment letter, stating that: “Competition between credit score models is likely to lead to more accurate and inclusive models that provide a broader population of borrowers with access to affordable credit.” NAFCU said the costs for the transition should be absorbed by the GSEs and not passed onto lenders.
The National Association of Realtors (NAR) also put its support behind option 3. Among its reasons, NAR wrote that there is a“need for competition to stimulate needed changes.”
Equifax wrote in its comments letter that it “does not support any of the credit score requirement options as detailed in the RFI because the three credit scores being contemplated by the FHFA are all based on legacy credit reporting technology that has since been updated and enhanced.”
JPMorgan Chase said that FHFA should retain a single credit score requirement and not update its credit model. “We urge FHFA to maintain its current requirements until it determines that an updated model would provide a substantial increase in accuracy, homeownership, and access to credit.”
Fair Isaac Corporation (FICO) stated that option 1 was the best route for all involved and that its FICO 9 be the preferred scoring model.
VantageScore said, “Of the options on the table, only Option 3…would create true and lasting competition. Choice would enable lenders to opt in to the cost of switching to a new model only when such a change would make business sense. Option 3 also eliminates the potential for 'score shopping' by requiring lenders to stick with their decision for a period of time.”
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.