National Mortgage News Online
2 March 2022
Mortgage industry stakeholders Tuesday called on Fannie Mae and Freddie Mac to implement more competition in credit scoring models during the latest session of a lengthy review process.
Credit scoring agencies were the loudest proponents for “Lender Choice” during a Federal Housing Finance Agency virtual hearing regarding the potential transition to a new credit scoring model. The government-sponsored entities have been using the classic FICO credit score since 2003, and the FHFA has long mulled using a new model.
The FHFA has floated four options: Option 1, maintaining the single score requirement for each borrower on every loan; Option 2, requiring multiple scores; Option 3, allowing lenders to deliver loans with any approved score; and Option 4, the “Waterfall” approach allowing a primary and secondary score.
“We urge the FHFA to adopt Option 3,” said Silvio Tavares, president and CEO at VantageScore. “It’s the best and only option that enables true competition and that will directly enable more creditworthy consumers to have access to mortgage loans.”
Tavares and other speakers, including representatives from Experian and Transunion, claimed competition from products like VantageScore would open the market to more underserved borrowers and drive down risk due to the use of alternative models that include rental payment data. VantageScore was created by credit industry giants Experian, TransUnion and Equifax.
“No proposed credit score option will be a silver bullet for expanding equitable access to credit,” said Sandra Thompson, FHFA acting director, in a brief statement at the start of the hearing.
Advocates for fair housing, homeowners and lenders including credit unions and banks endorsed Lender Choice, with a representative from America’s Homeowner Alliance comparing the option to lenders’ freedom to choose in the private mortgage insurance market. Joe Pigg, senior counsel and senior vice president for the American Bankers Association, offered an endorsement for Lender Choice and urged a safe harbor against litigation for lenders so they wouldn’t have to defend the use of a score.
Other industry voices, including a representative for FICO, called for maintaining the single score, claiming new models would cause confusion and raise costs. Smaller lenders may choose to only utilize portfolio lending rather than convert to another score model to sell loans on the secondary market, a representative for the Independent Community Bankers of America said.
“If an appraisal comes in too low to support a loan, we don’t allow additional appraisals until one finally allows the loan to move forward with mortgage credit that he or she can’t sustain,” said Eric Kaplan, director for the Center for Financial Markets at the Milken Institute.
The FHFA did not indicate a time frame for the next steps in their decision making process on credit scoring. Changes to the scoring model would happen over a long timeline and cost lenders, vendors, mortgage insurers and the GSEs plenty. A change to a new single score could cost the industry up to $250 million and take two years, while a change to multiple scores could cost between $374 million and $600 million and add an additional year to the process, an FHFA representative said.