FHFA Tables Credit Score Initiative

Written By: Joel Palmer, Op-Ed Writer

After spending months assessing and asking stakeholders for input, the Federal Housing Finance Agency (FHFA) has put on hold an initiative to change credit scoring models used by Fannie Mae and Freddie Mac.

FHFA said in a statement that it “is shifting its focus” to implementing Section 310 of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act. Section 310, also known as The Credit Score Competition Act, directs FHFA to create a process to validate and approve new credit scoring models for use by Fannie and Freddie.

"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," said FHFA Director Melvin L. Watt.  

"In light of that, we are communicating to Congress that we are transferring our full efforts to working with the Enterprises 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.  Thereafter, we will follow through on the steps required to implement the new Rule." 

Prior to the new law, FHFA had requested input from industry stakeholders and consumer advocates. 

Specifically, FHFA asked interested parties whether Fannie and Freddie should expand the credit scoring models used in assessing mortgage borrowers. Currently, the GSEs use only Classic FICO, or FICO 4. Based on the recent announcement, the GSEs will stick with FICO 4 for now, which many critics says is an outdated model.

The previous request for input asked respondents for their opinions on using FICO 9 and VantageScore 3.0.

FICO 9 scores 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.

The VantageScore model was introduced in 2006 and developed by the three nationally recognized credit reporting companies (CRCs), which are Equifax, Experian, and TransUnion.
VantageScore said its scoring system is more inclusive and provides credit scores to millions of people who otherwise don’t have a score. For example, it can score consumers who are new to the credit market. 

Its scoring criteria includes including payment history, age/credit type, percent of credit limit used, total balances/debt, recent credit, and available credit.

FHFA received more than 100 responses and was planning to announce a final decision by the end of the year. Opinions ranged from settling on a single score to 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. Others suggested further analysis was needed. 

At the direction of FHFA, Fannie and Freddie has assessed, over the past two years, the potential impact of updating credit score requirements. Based on these assessments, FHFA concluded that any change in credit score requirements will have little impact on mortgage processor and underwriters, as well as mortgage borrowers. 

At the same time, support has been widespread for using alternative credit scores. Several bills have been introduced in Congress over the last several years related to credit scores. The Consumer Finance Protection Bureau has pushed for alternative scores, as has The Urban Institute.

About the Author

As an NAMP® 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.

Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.