Background

Stemming from the Federal Housing Finance Agency’s (FHFA) 2019 validation and approval of credit score models final rule, the FHFA announced in October 2022 that Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) (the Enterprises), would transition away from the Classic FICO credit scoring system and approve the FICO 10T and VantageScore 4.0 models. When implemented, lenders will be required to deliver both FICO 10T and VantageScore 4.0 credit scores with each loan sold to the GSEs.

The October 2022 announcement also detailed that the GSEs will change the requirement that lenders provide credit reports from all three nationwide credit reporting agencies to require lenders to provide credit reports from two of the three credit reporting agencies. The FHFA began receiving comments on the implementation of updated credit score requirements in March. The agency estimated that the bi-merge credit report implementation could occur by the first quarter of 2024, and the implementation of the new credit score models is expected to happen over two phases in 2024 and 2025.

Congressional Feedback

In a recent House Financial Services Committee hearing on FHFA oversight, featuring testimony from FHFA Director Sandra Thompson, she discussed agency plans for the transition, including a commitment to limit burdens on stakeholders.

Multiple Republican committee members and Rep. David Scott (D-GA) voiced concern over the changes and asked for clarification on the proposed bi-merge credit reporting system. Members of the committee warned that the bi-merge system may harm the GSEs due to its incomplete accounting of an individual’s creditworthiness. Committee members also raised concerns over increased costs for applications and higher rates of rejection for individuals with thin credit files. Reps. Barry Loudermilk (R-GA) and Bryan Steil (R-WI) questioned whether the FHFA could prevent borrowers and lenders from “gaming” the system by choosing the two most favorable credit scores.

Director Thompson defended the change by arguing that the three credit reporting agencies are now nationally focused, lessening the importance of including three credit reports in contrast to when the agencies were divided by region. Thompson added that moving from tri-merge to bi-merge has a negligible material impact.

Rep. Brad Sherman (D-CA) also defended the bi-merge change, citing accuracy improvements due to the potential for increased competition among credit reporting agencies. Additionally, Rep. Steven Horsford (D-NV) noted that FICO 10T and VantageScore 4.0 would help expand access to credit by including monthly payments such as utilities and cell phone bills in calculating creditworthiness.

In her written testimony, Director Thompson outlined several of her expectations related to the changes:

• More accurate credit scores.The evaluation of new credit score models included extensive testing by the Enterprises to ensure that any validated and approved models met the necessary accuracy standards that are expected for widespread use in the market. Both FICO 10T and VantageScore 4.0 met those standards.

• More inclusive credit scores.While both Enterprises have already taken steps to expand equitable access to credit for those borrowers lacking extensive credit histories, such as through enhancements to their underwriting systems, both FICO 10T and VantageScore 4.0 include new payment history information such as rent, utilities and telecommunications payments when available.

• Enhanced safety and soundness in the housing finance system.Promoting accuracy and innovation in credit score models will ultimately lead to better outcomes for borrowers, lenders, investors, insurers, guarantors and the Enterprises. Additionally, because both FICO 10T and VantageScore 4.0 are more accurate than Classic FICO, the mortgage market will be provided with an improved view of risk from two different credit score models.

• Sufficient time to transition.FHFA and the Enterprises anticipate a multiyear transition and are committed to working with stakeholders to ensure a smooth process toward the use of the new credit score models and the new credit report requirements in a manner that avoids unnecessary costs and complexity. The transition timeline must be flexible enough to incorporate testing and unexpected events but also efficient enough to ensure that consumers, the Enterprises and others benefit from the more accurate credit score models.

Director Thompson also noted that on March 23, 2023, FHFA announced proposed implementation timelines for the use of FICO 10T and VantageScore 4.0 and for the Enterprises’ requirement to transition to a bi-merge credit report requirement. She also stated that the public engagement process will allow stakeholders to provide critical feedback and input on the implementation process and to work with FHFA and the Enterprises to further refine the proposed implementation plan.

Some stakeholders, including community banks and credit unions, have also raised some concerns about the changes, as well as support for certain aspects. In a recent letter from the Credit Union National Association to Director Thompson, credit unions noted their concerns about increased prices and other related regulatory burdens. They stated that, with full implementation of the credit score model updates anticipated for the fourth quarter of 2025, the increase in credit report prices combined with the requirement to deliver multiple scores could result in credit union members and other consumers paying greater credit reporting fees in the mortgage origination process for at least a year.

Director Thompson’s commitment in last week’s hearing to have a flexible timeline that considers stakeholder burdens is notable. As this process unfolds, it will be critical to continue to work with Congress and the FHFA to ensure a smooth transition that creates the best outcome for consumers and financial service providers.

Credit: JDSUPRA