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FHFA Credit Changes Could Expand Homeownership

FHFAWith the Federal Housing Finance Agency (FHFA) currently considering changing the credit score requirements for Fannie Mae and Freddie Mac, representatives from both FICO and its potential competition have been weighing in on the potential changes.

In late December, the FHFA issued a Request for Input, seeking feedback about the possibility of changing the credit scores the GSEs requires lenders to use to evaluate borrowers. According to the FHFA’s December press release, “The Enterprises currently use Classic FICO for product eligibility, loan pricing, and financial disclosure purposes.” The Request for Input seeks public comment on the possibility of allowing the GSEs to also let lenders use FICO 9 (an updated version of FICO’s original scoring algorithm) or VantageScore 3.0 (a rival model developed by credit reporting agencies Equifax, Experian, and TransUnion).

Those critical of the GSEs’ current requirements claim that they bar millions of Americans from home ownership. According to a 2015 Consumer Financial Protection Bureau study, 26 million Americans do not have any credit record, and another 19 million have credit records considered unscorable due to insufficient credit history or a lack of recent credit history.

As reported by Financial Times, VantageScore said in a public statement that “Monopolies never benefit markets or consumers and they create the opportunity for pricing power unchecked by competition.”

FICO Senior Director Joanne Gaskin replied, saying, “FICO welcomes competition—we just want to have fair competition.” A FICO representative further added that FICO "stands for safe and responsible access to credit, not lowering the standards which would pass the burden onto taxpayers."

FICO’s algorithm attempts to predict a consumer’s likelihood to repay their debts based on factors such as payment history, assigning a rating between 300 and 850. The updated FICO 9 system, according to FICO, provides a more sophisticated analysis of a borrower’s potential creditworthiness than the original system currently required by the GSEs. The competing VantageScore 3.0, first released in 2013, uses the same scoring range but different criteria, including payment history, age/credit type, percent of credit limit used, total balances/debt, recent credit, and available credit.

Gaskin also countered VantageScore claims that the GSEs adoption of VantageScore would bring in millions of new borrowers. “All of our data would suggest absolutely the otherwise,” said Gaskin.

Options being considered by FHFA include using both FICO and VantageScore scores, or allowing lenders to choose one or the other. The FHFA is seeking comment until February 2018. Input can be submitted electronically by clicking here.

About Author: David Wharton


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