The Federal Housing Finance Agency [1] (FHFA) proposed a rule to establish a four phase process for the government-sponsored enterprises (GSEs) to validate and approve credit score models. The FHFA said that the proposed rule is required by Section 310 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act).
Through this rule, FHFA will establish standards and criteria for the validation and approval of third-party credit score models used by Fannie Mae [2] and Freddie Mac [3]. The four-phase process would include:
- Solicitation of applications from credit score model developers
- Review of submitted applications
- Credit score assessment
- Enterprise business assessment
FHFA said that while the Act did not require the GSEs to use a third-party credit score model, but if Freddie or Fannie conditioned the purchase of a mortgage loan on a borrower's credit score, "that credit score must be produced by a model that has been validated and approved by the Enterprise based on the standards and criteria in the Act and FHFA regulations."
According to the proposed rule, the GSEs used credit scores in four ways at present. First, they were used for loan purchase programs which needed a minimum credit score as part of determining the eligibility of the borrower. Second, the GSEs used credit scores within some of their automated underwriting systems (AUS)—while Fannie Mae uses credit scores as a minimum threshold in its AUS, Freddie Mac uses them as part of the risk assessment within its AUS.
Third, the GSEs use credit scores for the grids published by them that disclose loan level price adjustments (LLPA) for Fannie Mae and Post Settlement Delivery Fees (Delivery Fees) for Freddie Mac. Both these grids are based on a combination of a borrower's representative credit score and the original loan-to-value ratio.
Lastly, the proposed rule said, the GSEs disclose credit scores to investors of Enterprise securities, credit risk transfer investors, and in their corporate filings to the Securities and Exchange Commission.
Read the full proposed rule here [4].