FHFA Ends Effort on Credit Scoring Overhaul

The Federal Housing Finance Agency announced this week that it is suspending an initiative to update the credit score model used by government-sponsored enterprises Fannie Mae and Freddie Mac. That initiative would have potentially helped to provide millions of creditworthy Americans who have been unable to be scored with a credit score and a path toward homeownership.

The FHFA, Fannie Mae, and Freddie Mac have been evaluating the impact of a new credit score model on access to credit. However, the FHFA says that it needs to instead shift its focus to the implementation of Section 310 of the Economic Growth, Regulatory Relief, and Consumer Protection Act that was enacted in May. The act modifies many of the changes that were made by the Dodd Frank Wall Street Reform and Consumer Protection Act. It also contains a provision that requires the FHFA to use alternative credit score models.

“After careful evaluation, we have determined that proceeding with efforts to reach a decision based on our [evaluation of a new credit score model] 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,” says 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 [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.” The FHFA had originally intended to release a final decision on its credit score initiative sometime this year.

The existing credit scoring model has been a source of ongoing debate for several years. FICO provides the most widely used current model. It has attempted to add less traditional sources of data, such as rent and utility payments, in helping to provide credit scores to consumers who lack a thorough credit background. However, such information is not widely reported to credit bureaus, which FICO obtains its data from.

An estimated 7.6 million consumers do not have a credit score. However, these consumers may be able to achieve a score of 620 or more under new models that include less traditional information, Mike Trapanese, senior vice president at VantageScore Solutions, said at a panel discussion sponsored by the Urban Institute last year. Under changes to current credit scoring models, about 3 million of these consumers may also then have the income and credit profile to purchase a median-priced home in their location.

The FHFA says it had conducted significant outreach to industry stakeholders on its efforts to date on a credit score overhaul. More than 100 stakeholders, including the National Association of REALTORS®, also responded to its request for input. This spring, NAR issued a comment that applauded the FHFA’s efforts to introduce new credit model to the GSEs, but also made it clear that they viewed this as the first step to more innovations in credit scoring. Read NAR’s comment letter.

“REALTORS® believe that homeownership is an integral part of the American dream that should not be out of reach for individuals and families that lack a deep borrowing history and consequently, access to traditional forms of credit,” NAR stated in the comment letter. “By assessing ways to increase the availability of credit to qualified borrowers who are good credit risks, as well as the potential risks involved with doing so, credit and lending institutions could restructure credit opportunity for millions of borrowers.”

FHFA Forced to Put Credit Score Decision on Hold,” Mortgage News Daily (July 24, 2018) and the Federal Housing Finance Agency