FHFA Wants Feedback on GSEs’ Use of Alternative Credit Scoring Models

The Federal Housing Finance Agency (FHFA) is seeking feedback regarding the operational and competition considerations of changing Fannie Mae and Freddie Mac’s current credit score requirements.

As part of this, the government-sponsored enterprises (GSEs) will be evaluating three different credit score models, including the Classic FICO model, which the GSEs are already using, as well as the newer FICO 9 and VantageScore 3.0 models.

The GSEs currently use Classic FICO for product eligibility, loan pricing and financial disclosure purposes.

In addition, the enterprises have recently implemented changes that allow their automated underwriting systems to evaluate borrowers who do not have a Classic FICO credit score.

“In issuing this request for input, FHFA hopes to obtain honest and reliable information and stakeholder feedback on the operational and competition aspects of changing Fannie Mae and Freddie Mac’s credit score requirements,” said Mel Watt, director of the FHFA, in a release. “Responses to the RFI will provide important details on the complexities of this decision, which is why I encourage stakeholders to respond in the most meaningful way possible.”

The GSEs have been exploring the use of alternative sources of credit data for more than a year now and have recently incorporated some of those capabilities into their underwriting tools.

However, during the Mortgage Bankers Association’s Annual Convention and Expo in October, 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,” Watt said. “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.”

In an interview with MortgageOrb in May, Chris Boyle, senior vice president and head of single-family sales and relationship management for Freddie Mac, explained that alternative sources of credit data are “predictive of a borrower’s ability to repay a mortgage, but it isn’t strictly data derived from the use of credit – for example, history of rent payment.”

Alternative credit data is different from trended credit data, Boyle explained, in that trended credit data “looks at credit data over a period of time to help understand whether the attribute in question is improving or deteriorating.”

Alternative credit data – which is primarily derived from bank statements – “probably has the greatest potential” to help “no credit file/thin file” borrowers get approved for loans, she said.

“We’ve specifically focused on how to help lenders expand opportunities for the approximately 25 million customers without a traditional credit score,” Boyle told Orb. “We’ve updated Loan Product Advisor to automate what had been a manual underwriting process for borrowers without credit scores.”

Meanwhile, a bill recently introduced in the Senate would actually require the GSEs to use alternative credit scoring models. Co-sponsored by Sens. Tim Scott, R-S.C., and Mark Warner, D-Va., the bill, if approved, would direct the companies to develop underwriting processes that would allow them to consider credit scores other than the traditional FICO, such as the VantageScore or FICO Score XD models.

To submit feedback to the FHFA, click here.

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