FHFA Approves Two Credit Score Models for Fannie and Freddie Mortgages
Written By: Joel Palmer, Op-Ed Writer
The Federal Housing Finance Agency (FHFA) approved use of the FICO 10T and VantageScore 4.0 credit score models by Fannie Mae and Freddie Mac.
“Today's decision will benefit borrowers and the Enterprises, along with maintaining safety and soundness," said FHFA Director Sandra L. Thompson. “While implementing the newer credit score models is a significant change that will take time and require close coordination across the industry, the models bring improved accuracy and a more inclusive approach to evaluating borrowers."
FHFA expects implementation of FICO 10T and VantageScore 4.0 to be a multiyear effort. Once implemented, lenders will be required to deliver both FICO 10T and VantageScore 4.0 credit scores with each loan sold to the enterprises.
Last week’s announcement is part of an initiative to modernize credit score model requirements, which began in 2014 following passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act. A section of this law required FHFA to create a process for validating and approving credit score models.
The Classic FICO model has been the standard credit score model for the past 20 years.
FHFA said the new credit score models will result in:
More accurate credit scores. Part of the evaluation of new credit score models included extensive testing by the enterprises to ensure that borrowers are treated fairly and to protect the safety and soundness of the mortgage market.
More inclusive credit scores: The new scores include new payment history information such as rent, utilities, and telecom payments when available.
Enhanced safety and soundness in the housing market: Promoting accuracy and newer innovative credit score models in the housing finance system will ultimately lead to better outcomes for borrowers, lenders, and the enterprises, the agency said. 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.
FICO 10T incorporates trended credit bureau data. Different than traditional credit bureau data, the use of trended data considers a historical view of data such as account balances for the previous 24+ months, giving lenders more insight into how individuals are managing their credit.
When it was launched more than two years ago, FICO said the new credit score could reduce mortgage loan defaults by 17 percent compared to the traditional FICO score used in the industry.
VantageScore claims its 4.0 version added features that make it possible to score 37 million more U.S. adults than previously possible. This model also uses trended credit bureau data.
FHFA also announced that the enterprises will work toward changing the requirement that lenders provide credit reports from all three nationwide consumer reporting agencies. Instead, only two reports will be required. FHFA said the enterprises will work with stakeholders on a plan for implementing the change.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
