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Senators Call on FHFA to Abandon Bi-Merge Credit Proposal

In a letter to Federal Housing Finance Agency (FHFA) Director Sandra L. Thompson, Sen. Tim Scott, Ranking Member of the Senate Committee on Banking, Housing, and Urban Affairs, is calling on the Agency to implement reforms to credit scoring models that will expand homeownership opportunities for creditworthy borrowers and make scores more predictive.

Sen. Scott, along with Sens. Mike Crapo, Mike Rounds, Thom Tillis, John Kennedy, Bill Hagerty, Kevin Cramer, and Steve Daines, also pushed FHFA Director Thompson to abandon plans to transition from the current requirement that lenders provide credit reports from all three (tri-merge) national consumer reporting agencies (CRAs) to only two (bi-merge), arguing the move would negatively impact access to credit. Sen. Scott and his colleagues urged the FHFA to work with the private sector to ensure better coordination and data sharing during the transition to new credit scoring models.

“We write to express our concerns regarding the Federal Housing Finance Agency’s (FHFA) ongoing transition to and implementation of updated credit score models and credit report requirements for loans acquired by Fannie Mae and Freddie Mac (the Enterprises),” said the Senators in the letter. “The bipartisan Credit Score Competition Act was signed into law over five years ago … Section 310 established requirements for use of third-party credit scoring models by the Enterprises, updating their decades-old model and allowing for the inclusion of alternative data sources like rent, utility, and telecom bill payments. Including this alternative data into scoring models will expand homeownership opportunities for creditworthy borrowers and make scores more predictive.”

The Credit Score Competition Act directs the FHFA to create a process by which credit scoring models can be validated and approved for use by the GSEs when they purchase mortgages. Section 310 of the Credit Score Competition Act, in particular, amends the Federal National Mortgage Association Charter Act by adding new provisions requiring the FHFA to create a process for new credit scoring models to be validated and approved for use by the GSEs in the purchase of residential mortgages.

A recent analysis by TransUnion found that moving to a bi-merge system could result in two million consumers becoming ineligible for a GSE mortgage. Their ineligibility would be due to gaps that can exist among lenders when it comes to reporting. Using only two credit scores will often result in an incomplete and inaccurate picture being painted of a potential borrower–particularly if a consumer’s most favorable set of credit data is the one that gets excluded. Additionally, 600,000 new mortgage borrowers per year could end up paying more in interest under the bi-merge proposal than they would have if all the tri-merge information was used, and could cost consumers $6,600 in additional interest over the life of a mortgage.

Showing support for the transition to a bi-merge system is the Community Home Lenders of America (CHLA), a trade group the expressed its appreciation for the ongoing efforts of the FHFA in enhancing the credit score reporting process, and expanding mortgage access.

“CHLA commends Director Thompson for announcing public listening sessions on the transition to updated credit score models and credit report requirements for loans acquired by Fannie Mae and Freddie Mac," said CHLA Executive Director Scott Olson. "CHLA recently sent a letter publicly supporting FHFA and encouraging them to slow the implementation of the credit score process. We look forward to continuing to work with Director Thompson, and her staff, at developing a credit scoring model for the GSEs which support and protects all borrowers.”

According to Certified Credit in an article titled "New Changes Coming to Credit Scoring Models & Credit Reporting," both borrowers and mortgage lenders can benefit from the bi-merge implementation, as mortgage lenders may be able to reduce their credit reporting costs, and lenders can then pass on these cost savings to their borrowers to make their mortgages more affordable. And since mortgage lenders can choose which credit bureaus they want to use for their bi-merge reports, credit bureaus may have to improve their offerings to get chosen consistently--competition which may inspire more innovation, improving the credit industry for everyone involved.

“While FHFA’s announcement of implementation represented a positive step toward bringing more predictive data into the system, the Agency simultaneously announced that the Enterprises would be transitioning from the current requirement that lenders provide credit reports from all three (tri-merge) national consumer reporting agencies (CRAs) to only two (bi-merge),” continued the letter from the coalition of senators. “FHFA’s decision to implement the bi-merge would inherently result in incomplete data being reported to the Enterprises. This decision is seemingly at odds with the implicit goal of Section 310, which is to allow for consideration of more data to increase predictiveness of credit models.”

The letter concludes, “We encourage you to abandon plans to transition from a tri-merge to the bi-merge credit report which run counter to the spirit of Section 310 and afoul of the traditional process for notice-and-comment rulemaking. Rather than increasing risk, FHFA should maintain the current timeline for implementation of the new credit scoring models five years since Section 310 was enacted."

Click here to view the full letter to the FHFA.

About Author: Eric C. Peck

Eric C. Peck has 20-plus years’ experience covering the mortgage industry, he most recently served as Editor-in-Chief for The Mortgage Press and National Mortgage Professional Magazine. Peck graduated from the New York Institute of Technology where he received his B.A. in Communication Arts/Media. After graduating, he began his professional career with Videography Magazine before landing in the mortgage space. Peck has edited three published books and has served as Copy Editor for Entrepreneur.com.
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