Fannie, Freddie Should Use Updated Credit Scoring, CFA and Other Consumer and Civil Rights Groups Urge FHFA
By Barry Zigas, Consumer Federation of America
CFA joined the Leadership Conference on Civil and Human Rights (LCCHR), National Fair Housing Alliance (NFHA) and Woodstock Institute in urging the Federal Housing Finance Agency (FHFA) to support more rapid Adoption Of Alternative Credit Scoring Approaches For Mortgage Lending to make the mortgage lending process accessible to the broadest possible number of consumers.
The comments were filed in response to a Notice of Proposed Rulemaking sparked by legislation adopted in the last Congress directing FHFA to establish standards and criteria for the validation and approval of credit scoring models. Credit scores are derived from consumer information collected by Credit Reporting Agencies (CRAs) from creditor reporting on consumers’ debt and credit line repayments.
FHFA is the conservator and regulator of Fannie Mae and Freddie Mac (the ‘GSEs’), the dominant funders of mortgage credit in today’s market. The two companies only permit the use of one credit score – provided by Fair Isaacs as the familiar “FICO” score – by lenders seeking to sell or securitize mortgage loans through the companies. Moreover, the only score authorized by the companies at this time is so-called “Classic FICO,” which has not been updated in many years. However, neither Fannie nor Freddie has been willing to adopt newer models from FICO or other competitors such as Vantage Score LLC, leading to the congressional direction.
“Having a process in place for Fannie and Freddie to regularly assess new and emerging models to ensure as many consumers as possible are judged as fairly and comprehensively as possible is a critical part of assuring broad and fair access to responsible mortgage credit,” noted Barry Zigas, CFA Director of Housing Policy. “FHFA’s draft rule is a good step in this direction but needs further improvement.”
The comment letter urged FHFA to find ways to shorten proposed time lines for assessing new scores, noting rapid cycle times in emerging technologies and the GSEs’ own underwriting engines.
The letter also opposed FHFA’s proposed restriction on the adoption of any scores from companies in which credit reporting agencies have a financial or ownership stake. At present this prohibition would apply only to Vantage Score, which is owned by the three major credit reporting agencies, Transunion, Equifax and Experian. The letter noted that the concerns about anti-trust and anti-competitive pricing cited in the proposed rule have been addressed in litigation and resolved in favor of Vantage Score, and that scores from both FICO and Vantage Score are in wide use by other creditors in auto and consumer lending without any evidence of the anti-competitive concerns cited in the proposed rule.
“We support FHFA direction to the GSEs not only to incorporate the latest tested and verified credit scoring models available, but also to open up their process to other scores than FICO and over time other models that may emerge,” the letter stated. “This would bring the mortgage marketplace in line with other credit markets and, we believe, help assure the broadest possible access to GSE mortgage credit.”