Due to the implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155) in May, the Federal Housing Finance Agency (FHFA) has for now canceled its current plan to explore the use of alternative credit scoring models by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
In an announcement on Monday, the agency says it will not make a decision regarding the use of alternative credit scoring models by the GSEs in 2018.
Instead, the FHFA will shift its focus to implementation of Section 310 of the Act, which requires the agency to define, through rulemaking, the standards and criteria the GSEs will use to validate credit score models.
In essence, implementation of the Act has put a new timeline in place for the FHFA’s efforts in evaluating the potential impact of a new credit score model or models. The new Act directs the GSEs to explore the development of new credit score models. Much like before, the GSEs must take into consideration the impact on access to credit, safety and soundness, operations in the mortgage finance industry, and competition in the credit score market, when developing these new models.
The FHFA has been evaluating the use of alternative credit score models for mortgage underwriting for several years now. In December, the agency announced that it was seeking feedback on the “operational and competition considerations” of changing Fannie Mae and Freddie Mac’s current credit score requirements.
At the time, the FHFA said the GSEs were evaluating three different credit score models, including the Classic FICO model, which they currently use, as well as the newer FICO 9 and VantageScore 3.0 models. The FHFA had planned to issue a final decision in 2018.
But in February the agency announced it had extended the deadline for feedback to March 30 from Feb. 20.
The newly enacted Economic Growth, Regulatory Relief, and Consumer Protection Act – which relaxes some of the regulatory burden imposed on small to midsize lenders under the Dodd-Frank Act – outlines a new “validation and approval” process for establishing any new credit scoring models that will be used by the GSEs. This new process for developing the alternative models is likely why the FHFA has put the brakes on its current plan, however, the agency’s release does not directly state that.
“After careful evaluation, we have determined that proceeding with efforts to reach a decision based on our Conservatorship Scorecard Initiative process and timetable would be duplicative of, and in some respects inconsistent with, the work we are mandated to do under Section 310 of the Act,” explains Mel Watt, director of the FHFA, in the release. “In light of that, we are communicating to Congress that we are transferring our full efforts to working with the [GSEs] to implement the steps required under Section 310.
“These steps include developing a proposed rule, receiving and evaluating public comment on the proposed rule and issuing a final rule to govern the verification of credit score models,” Watts says. “Thereafter, we will follow through on the steps required to implement the new rule.”
During last year’s Mortgage Bankers Association’s Annual Convention and Expo, Watt said whether the GSEs should make use of alternative credit scoring models is a tough call.
“To fully analyze whether we should require the enterprises to update their credit score model requirements – including possibilities that would involve using more than one credit score provider – we’ve had to look at the issue from multiple angles,” he said during the October 2017 conference. “For example, do alternative credit scoring models actually increase access to credit by providing credit scores on more borrowers who are credit worthy and able to pay a mortgage? How does this compare with the enterprises’ current ability to evaluate borrowers without a credit score? How do we ensure that competing credit scores lead to improvements in accuracy of credit decisions and not just to a race to the bottom with competitors competing for more and more customers? What would be the implementation and operational costs to the enterprises, lenders, and other industry participants of converting to an alternative credit score or a multiple-score system? Does the credit repositories ownership of one of the credit score providers present implications for long-term competition in the credit scoring market?”
Watt said initially he thought the decision “would be relatively easy to make.”
“After all, we all believe that competition is good, don’t we?” he said. “However, the more we looked into this issue, the more complicated it became and it is turning out to be among the most complicated decisions I have faced during my tenure at FHFA.”