To the Point With Bob: Why Moving to a Single-file Credit Report Framework Is a Win for Consumers and Lenders
(To the Point with Bob is a periodic blog by MBA President & CEO Bob Broeksmit, CMB. You can view this and past blogs here)
The tri-merge credit reporting requirement has become a license for price gouging and ripping off consumers. MBA and its members have had enough. Shielded by a government-granted oligopoly, the credit bureaus have used a no-choice system to raise prices and resist competition at the expense of mortgage borrowers and lenders.
Last August, MBA’s 46-member Residential Board of Governors – representing a diverse cross-section of banks and IMBs of all sizes – approved a policy calling for an end to the anti-competitive tri-merge requirement. RESBOG members analyzed their own historical data to evaluate the disparities in credit report tradeline coverage, credit scores, and loan performance.
The decision? With the appropriate business rules governing the process, the industry should adopt a single-file report framework.
In December, MBA sent a letter to Federal Housing Finance Agency (FHFA) Director William Pulte asking his agency to direct Fannie Mae and Freddie Mac (the GSEs) to allow lenders the option to use a single credit report from one national credit repository for borrowers if the initial report shows a credit score of at least 700, rather than requiring a tri-merge report for every borrower.
We continue to have meaningful conversations with our members, FHFA, and the GSEs on the necessary data, resources, and steps required to put this new policy together. The momentum must continue because the alternative would be many more years of price hikes with no competition and little improvement in quality or service.
Every solution to a problem brings new challenges, but we cannot shy away from fixing a broken system just because it is hard. A failure to act will lock borrowers and lenders into a perpetual spiral of higher credit reporting costs.
Below are MBA’s responses to the Community Home Lenders of America’s recent objections to a single-file reporting framework:
CHLA: “A Single Bureau Credit Pull model could disadvantage veterans, rural families, and first-time homebuyers – if FHA, RHS, and VA don’t adopt this approach. If this occurs, it will discourage lenders from using these critical low-downpayment-loan programs, due to the cost of doing more credit pulls these programs may require.”
MBA: Today’s tri-merge requirement imposes substantial systemic costs driven by low pull-through rates. Reducing these inefficiencies would lower overall origination costs, benefiting all borrowers, including those relying on FHA, RHS, and VA programs. Rather than discouraging participation in these programs, a streamlined credit model would make them more affordable and sustainable for lenders and consumers alike. FHA, VA, and RHS loans are already inherently more challenging to originate, but loan officers still put in the work when a borrower can’t qualify for conventional financing. MBA’s proposal does not change that dynamic; rather, it offers the prospect that government programs may be fast followers in adjusting their credit reporting requirements.
CHLA: Costs could increase for consumers that shop for mortgage rates. If one lender uses one score, one bureau – and another competing lender uses a different one – the borrower could potentially be charged two upfront credit charges to see the pricing differences between the two lenders.
MBA: It isn’t possible today to transfer a credit report pull from one lender to another. Under a single-file model, a borrower who shops at two lenders would pay for two credit reports, rather than paying for six today in a tri-merge framework. It is also extremely rare today for a borrower who is shopping to be charged upfront for a credit pull – though that may very well change if the credit bureaus are allowed to continue to exploit their monopoly and increase prices.
CHLA: A switch to a single bureau model could make it harder for aggregators/investors to price loans – leading to risk premiums in loan pricing that raise rates. The lack of data on pricing of MSRs during the transition period could create risk and uncertainty – which will be priced into loans, as we saw during the COVID crisis.
MBA: The current government-granted oligopoly system has seen credit costs rise by roughly 400% over four years, despite using precisely the same models and almost the same data. The research suggests that the variations, particularly at the top and in the middle of the score curve, are infrequent in the aggregate, and not significant enough to warrant the extra cost of a tri-merge for borrowers in those ranges. There will undoubtedly be a transition period and necessary investor education, but the long-run impacts should not result in risk premiums significant enough to increase costs for borrowers. In addition, forcing greater competition could lead to refinements in credit scores or reports that increase their accuracy.
With respect to MSR investors, today they see only one score – the middle or “representative” score. There is a one-in-three chance the representative score is the “right” score. In a single-file framework, they will see one score, with the same one-in- three chance that it’s the “right” score. Variations in score between bureaus are generally modest.
Moreover, single-file framework would be an option, not a mandate. Any lender that found a competitive advantage from staying with a tri-merge could continue with a tri-merge.
CHLA: Pricing uncertainty will increase based on what score and what bureau the lender uses. Lenders already expect three pricing grids: one for FICO Classic, one for VantageScore, and one for FICO 10T.
MBA: This appears to be a criticism of FHFA’s decision to transition from FICO Classic to credit score choice between VantageScore and FICO 10T. MBA believes it would be unnecessary to have separate LLPA grids for each individual bureau.
CHLA: Not all data sources report to all three bureaus. Thus, undisclosed debt risk increases with just one bureau, one score. This could also lead to greater repurchase risk for lenders if they use a score that misses debt or other credit issues.
MBA: The GSEs and our members have both reviewed and analyzed the same data on the variations in tradeline coverage between the three bureaus. Given the size of their books, the GSEs possess the most robust insights on tradeline and score variances. Based on our discussions with the GSEs and our prior work on the rep and warrant framework, we do not believe they would adopt a one-report policy while holding lenders responsible for data that appears on one of the other two bureaus that the lender was not required to obtain. We would insist on that approach as any other policy would defeat the objective of delivering meaningful cost relief to borrowers.
CHLA: A lack of coordination among the major federal housing regulators (FHA, RHS, VA, and FHFA), could complicate this model greatly – just as it did under the subsequently abandoned bi-merge proposal of the Biden administration. This would significantly undermine any benefits of a Single Credit Bureau Pull model. FHFA, FHA, VA and RHS today do not work together on credit score reforms, and no other federal entity seems likely to coordinate them or order them to do so.
MBA: The FHA complication is not that hard to solve for, and a lender generally determines, irrespective of credit score/report, whether someone is eligible for a VA or USDA loan. For FHA, if a lender pulls the first bureau report and it comes back with a 750-credit score, they would know that they aren’t likely going to go FHA and would not need a tri-merge. If the borrower tells the lender they are a veteran and don’t plan to spend or have funds for a down payment, the lender can pull three reports for the VA, assuming they do not adjust their requirements.
The government agencies are also involved in the conversation on a single file and may be able to adjust their policies in the future, tailored to each program’s risk profile. The lender can also choose to pull three at the outset for any borrower, as no one is advocating for a requirement that lenders can pull only one report. If a lender likes tri-merge, it can continue to use it.
CHLA: Gaming or score fishing will be incentivized. Lenders could pull three credit scores, but only deliver with 1 credit score, thus avoiding the inferior credit score. This could also lead to greater repurchase risk for lenders.
MBA: Straightforward business rules can easily deal with gaming issues like this. For example, a lender could be required to deliver every report and score that they pulled. While incremental repurchase risk must be avoided in any program design, repurchase could be a consequence if GSE sellers disregard clear business rules or misrepresent their origination process.
CHLA: Concerns about how Mortgage Insurers (MIs) will view and price in response. MIs may assume a gaming system and price accordingly.
MBA: MIs play an important role as first risk takers, and we have had helpful and constructive conversations to better understand how a move away from a tri-merge mandate would impact their pricing. While analysis and evaluation are still ongoing, we have seen preliminary results that indicate that risk and any potential changes to pricing would be minimal on an aggregate level.
CHLA: Proponents of the single bureau option say all three Credit Bureaus produce similar results. However, the facts don’t support this. The three Credit Bureaus are building different data sets/models, therefore even the same score will differ between bureaus (FICO Classic, VantageScore or FICO 10T):
• Equifax is building utility and telco data
• Experian has invested heavily in rental data
• TransUnion is building an alternative credit database. (“Alternative credit” is anything the borrower pays regularly)
MBA: Free market competition would allow the market to respond to these data coverage changes and assign them value. Moreover, oversight by the GSEs regarding which data drive better predictiveness would produce a convergence in accuracy and data, as the data that are significantly more predictive would be worth more. These incentives to innovate or improve are not present in the tri-merge credit reporting market today. By moving to a single file framework, the GSEs would also have an incentive to exercise greater counterparty oversight over the bureaus. Today, the GSEs’ answer to counterparty oversight of the Bureaus is, “none of them is particularly good, so let’s make the borrower pay for all three.” That is unacceptable and must end.
CHLA: Today, 23% of consumer data is not reported to all three bureaus (industry sources).
MBA: While the credit bureaus often make this point, those who have seen the data indicate that the information that is not reported to all three bureaus is significantly less predictive of a borrower’s capacity and ability to repay. Put simply, the large and significant sources of the most predictive consumer debt are consistent furnishers to all three bureaus.
CHLA: We expect that alternative data in new scores may change data reporting. Disparities may increase, not decrease (for example, cellular phone data may only be available to one bureau).
MBA: The three bureaus collecting different data, rather than the most predictive data, is a recipe for locking in the tri-merge. But if the credit bureaus are forced to compete and held to reasonable standards for accuracy and completeness, it is logical to expect a convergence in the material information sources that they seek, not a divergence. Different bureaus adopting different bodies of additional data is a further argument for single file – the bureau that gets the data that best improves predictiveness should be rewarded. If they all go different directions and tri-merge remains, it’s just a justification for further unrestrained price hikes.
CHLA: At lower FICO ranges, one can see even wider disparities for borrowers.
MBA: MBA’s current proposal to accept a single score of 700 or above would address this criticism. And before one makes the point that this would disadvantage FHA borrowers, it is important to remember that there are already charges or costs in the credit system that account for the expected higher risk of default among lower FICO borrowers – see LLPAs for example.
CHLA: The three credit bureaus have financial incentives to differentiate among themselves other with respect to their data models, in order to maximize their market share.
MBA: This clearly is not the reality in today’s tri-merge mortgage market. Who really thinks the credit bureaus are competing for lenders’ business today? Who thinks that the recent price hikes are fair and reflect improvements in the quality of the product?
Financial incentives to differentiate themselves presumably exist in other markets because they compete for that business. That is good, and those incentives will only get stronger if they must compete for business in the mortgage market rather than be granted a guaranteed 100% market share by the government.
Ultimately, MBA believes strongly that a single-file framework promotes beneficial competition in the credit reporting space, encourages innovation, streamlines origination processes, and reduces borrower and lender costs that have seen dramatic increases in recent years.
