MBA Urges FHFA, GSEs to Foster ‘Fair and Competitive’ Credit Score Requirements

The Mortgage Bankers Association, in comments to the Federal Housing Finance Agency, said regulations governing use of credit scores at Fannie Mae and Freddie Mac should foster “a fair and competitive market that supports innovation and access to affordable credit.”

The Mar. 30 MBA letter, in response to a Dec. 2017 FHFA Request for Input on potential changes to credit score requirements at Fannie Mae and Freddie Mac, urged FHFA and the government-sponsored enterprises to adhere to the following principles with respect to credit score requirements:

–Any decisions regarding existing credit score requirements should be data-driven and analyzed thoroughly;

–Any accepted credit scoring models–regardless of provider–should be subject to frequent, rigorous testing of their predictive capacity by FHFA and/or the GSEs;

–Competitive forces typically produce better results in the market by stimulating innovation and lowering costs; therefore changes to the existing requirements, as well as the review process for future changes, should extract the benefits of competition in credit score modeling;

–The regulatory system governing credit scoring models should be structured to incentivize ongoing efforts to improve predictive capacity and reliability throughout the credit cycle; other objectives, such as expanded consumer access to credit, should also be pursued so long as they do not compromise predictive capacity and reliability;

–Current efforts that are focused on data provided by the national credit reporting agencies (Equifax, Experian and TransUnion) should not displace or otherwise discourage efforts focused on the use of additional data sources, such as telecommunications, rent or utility payments; and

–FHFA and the GSEs should abide by transparent processes for maintaining and/or changing the GSE credit score requirements; such processes should include regular communication with a wide variety of mortgage market participants.

MBA also recommended FHFA and the GSEs begin the process of eliminating the “tri-merge” requirement that lenders seek credit reports from all three national credit reporting agencies. However, MBA cautioned that this process should only be finalized if, after thorough analysis, FHFA determines that doing so would not harm the safety and soundness of the GSEs.

“While credit scores play only a limited role in the underwriting process for loans acquired by the Enterprises, their impact on borrower eligibility and loan pricing warrants periodic review,” wrote MBA President and CEO David Stevens, CMB. “Given that any changes to the existing Enterprise requirements would entail operational challenges that bring with them additional costs, it is important to understand what can be gained from such changes.”

MBA noted new models hold potential to improve the predictive capacity of credit scores. “Increased predictive capacity translates into better risk management tools available to a wide variety of market participants, including the Enterprises,” Stevens wrote. “Where minimum credit scores serve as eligibility criteria, improved models could lower default rates. In many cases, pricing could also be more accurately aligned with the corresponding default risk of the loan. These outcomes would be unambiguously positive for the broader mortgage finance system.”

Stevens added the existence of a periodic review process “should itself spur innovation in credit score modeling. Providers of credit scoring models will face greater incentives to update and improve the predictive capacity of their models in an environment in which FHFA and the Enterprises regularly evaluate the suitability of these models. Without such reviews, there would be diminished motivation to innovate, particularly for new providers that would otherwise seek Enterprise eligibility for their models. Therefore, even if the Enterprise requirements are not changed at present, the understanding that reviews will continue to occur (preferably on a regular and predictable timetable) should drive competitive forces in this sector.

“Ultimately, Stevens said, ongoing review of the Enterprise credit score requirements presents an opportunity to reduce default risk in the mortgage finance system while potentially improving consumer access to credit. “While any transition to new requirements will entail costs and challenges, MBA believes that periodic reviews of Enterprise standards are a necessary condition to encourage innovation,” he wrote. “We would once again emphasize the principles described above, which prioritize rigorous, data-driven approaches that foster competition, innovation and transparency.”