FHFA Issues Proposed Rule on Validation, Approval of Credit Score Models

The Federal Housing Finance Agency yesterday asked public comment on a proposed rule that would establish standards and criteria for the validation and approval of third-party credit score models used by Fannie Mae and Freddie Mac.

The proposed rule would establish a four-phase process for an Enterprise to validate and approve credit score models:

–Solicitation of applications from credit score model developers

–Review of submitted applications

–Credit score assessment

–Enterprise business assessment

Although the Economic Growth, Regulatory Relief, and Consumer Protection Act passed in May does not require the Enterprises to use a third-party credit score model, if Fannie Mae or Freddie Mac purchase a mortgage loan on a borrower’s credit score, that credit score must be produced by a model that has been validated and approved by the Enterprise based on the standards and criteria in the Act and FHFA regulations.

FHFA noted before the Act’s passage, it had been actively evaluating the potential impact of a new credit score model or models as part of an ongoing Conservatorship Scorecard Initiative. The issue has intensified over the past several years as emerging alternatives such as VantageScore have grabbed market share.

Products from VantageScore, a joint venture of Equifax, Experian and TransUnion, had been under consideration by the GSEs until July, when FHFA announced the GSEs had postponed its consideration pending its compliance with the Act. FHFA had previously noted use of alternate credit score models by the GSEs “could have wide ranging implications for the mortgage origination and secondary markets.”

The proposed rule has a 90-day comment period following publication in the Federal Register, A link to the proposed rule can be accessed at https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Validation-and-Approval-of-Credit-Score-Models.aspx.