Fannie Mae and Freddie Mac recently made headlines when congress members said that the GSEs had a monopoly on their credit scoring system due to their singular use of the FICO Score.
The H.R. 4211 bill, also titled the “Credit Score Competition Act of 2015,” was introduced by U.S. Rep. Ed Royce (R-California) and U.S. Rep. Terri Sewell (D-Alabama)—both members of the House Financial Services Committee—to the House of Representatives.
The bill would allow Fannie Mae and Freddie Mac to consider alternative credit-scoring models instead of the FICO model, which would open up homebuying options for many consumers whose credit does not meet the current standards.
Together, Fannie Mae and Freddie Mac occupy 90 percent of the secondary mortgage market, the release said. The use of one credit scoring model has nearly created a monopoly in this field. Reps. Royce and Sewell suggest that additional credit scoring models would "foster competition and innovation in the credit scoring industry."
“The GSEs' use of a single credit score is an unfair practice that stifles competition and innovation in credit scoring. Breaking up the credit score monopoly at Fannie and Freddie will also assist them in managing their credit risk and decreases the potential for another taxpayer bailout," Rep. Royce said.
These accusations bring up one important question: How does FICO feel about the situation?
Joanne Gaskin, Senior Director, Scores & Analytics at FICO, sat down in an exclusive interview with DS News to reveal where the company stands in this move to introduce more credit scoring systems at Fannie Mae and Freddie Mac and enhance credit access among borrowers.
Q: What is FICO's stance on the new credit scoring model proposed in the newly introduced regulation to change the singular, FICO credit scoring model at Fannie Mae and Freddie Mac and consider more options?
A: We understand the intent of the legislation that has been put forward. The interesting thing to note is the GSEs process of evaluating the competing scoring models for potential adoption is actually well underway. FICO fully supports the evaluation process that’s going on right now. We think the key is to simply allow the GSEs and the FHFA to continue to conduct their analysis without interference.
In fact, the FHFA 2016 Scorecard, discusses the analysis conducted in 2015 which included the assessment of leveraging alternate or updated credit scores as appropriate. We would like to see the market adopt our latest score version: FICO Score 9.
FICO Score 9 is the latest scoring model and most-predictive to-date. An important new feature of FICO Score 9 is that we have differentiated treatment for medical collections from non-medical collections, which has been discussed at great lengths in the marketplace. It is an approach to drive as much value out of the data that exists in order to make the most predictive score for origination purposes. A more predictive score tends to mean more consumers qualify for credit or qualify for better terms.
Q: How does the newly introduced regulation affect the mortgage industry? Are we locking out potential buyers using only one scoring system?
A: The newly -introduced legislation supports the existing process of GSEs and FHFA in the evaluation of competing credit score models.
The implication that the GSEs' use of the FICO Score is locking potential buyers out is without merit. Today, 190 Million consumers receive a FICO Score. There are an additional 28 Million consumers that have information at the three major credit bureaus but do not obtain a FICO Score for the following reasons: “inactive credit” (e.g. 3-4 years since any account was last updated), “collection-only” (i.e., this is the only information in their credit file), or they have only a single account that is “too new” (less than 6 months payment history). Scoring these individuals is not only analytically unsound but will lock many consumers into low scores effectively freezing them out of mainstream credit. It is punitive to return a low score to these consumers whose credit status is frozen in time—often as a result of a period of prior financial distress.
Furthermore, returning a score for consumers who have a single tradeline less than 6 months old or have collection-only information in their credit files will not qualify them for a mortgage. Lastly, a consumer without a credit score can avail themselves of the GSEs manual underwriting process as a pathway to homeownership.
Q: Is this singular model really a credit score monopoly at Fannie and Freddie? Is it fair? What about competition in the industry for other credit scorers? How do we innovate?
A: There is no credit score monopoly. Lenders have always freely acquired FICO scores from the three primary credit repositories for making credit score decisions. The GSEs are conducting a comprehensive evaluation today of competing credit score models. The process is very similar to that which lenders undertake.
There is no monopoly; instead there is a decision process well underway in order to make a determination what scores will be most beneficial for the GSEs to use within their business. FICO happens to be just one input to the overall automated underwriting process. In fact, the GSEs developed their own credit model to make the purchase decisions. The interesting thing is if we look outside of the mortgage space, the most widely used scoring model in the marketplace is FICO Score 8, which is not in use by the GSEs. So, the GSEs' selection of a score does not create a monopoly.
Q: If Congress does not move forward with the bill, in what ways can we increase access to credit? Is FICO doing anything to increase access to mortgage credit?
A: Access to credit is an incredibly important issue. What FICO is doing now in that realm is the introduction of a new scoring model called FICO Score XD, which is intended to address the ‘credit invisible’ population or the population of about 50 million consumer who have absolutely no information at the three main credit repositories. We have gone out and looked for compliant datasets that come from both Equifax and Lexis Nexis in order to create a score that will open a pathway to credit for those that are credit invisible today. This is a much better approach than just relaxing minimum credit score criteria and using stale data at the credit repositories in order to score more consumers.
FICO Score XD is in pilot mode right now with the 12 largest credit score issuers. We expect a full release for unsecured credit into next year. FICO Score XD creates a great opportunity for a consumer to gain access to credit because they have either paid a utility on time, telecom, or have other positive information outside of the credit repositories to help create this new pathway to credit. Once a consumer has acquired credit through the use of FICO Score XD for six months, they will obtain a traditional FICO score. This is a great approach for solid, sustainable access to credit.