FHFA: ‘No Decision’ This Year on Updating Credit Score Model

The Federal Housing Finance Agency yesterday announced it will not make a decision this year about updating the credit score model used by Fannie Mae and Freddie Mac.

FHFA said (https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Decision-to-Stop-Credit-Score-Initiative.aspx) instead of an update this year as previously announced, it will shift its focus to implementing Section 310 of the Economic Growth, Regulatory Relief and Consumer Protection Act, enacted in May. The Act requires FHFA to define, through rulemaking, the standards and criteria the Enterprises will use to validate credit score models.

“After careful evaluation, we have determined that proceeding with efforts to reach a decision based on our Conservatorship Scorecard Initiative process and timetable would be duplicative of, and in some respects inconsistent with, the work we are mandated to do under Section 310 of the Act,” said FHFA Director Melvin Watt. “In light of that, we are communicating to Congress that we are transferring our full efforts to working with the Enterprises to implement the steps required under Section 310.”

Those steps, Watt said, include developing a proposed rule; receiving and evaluating public comment on the proposed rule; and issuing a Final Rule to govern verification of credit score models.

Since 2015, FHFA, Fannie Mae and Freddie Mac have been actively evaluating the potential impact of a new credit score model or models on access to credit, safety and soundness, operations in the mortgage finance industry and competition in the credit score market for some time as part of an ongoing Conservatorship Scorecard Initiative.

Fannie Mae and Freddie Mac Seller Guides require them to use three “legacy” credit scoring models developed by Fair, Isaac Corp. (FICO) through Equifax, Experian and TransUnion. However, other credit scoring companies, such as VantageScore (a joint venture of those three companies) use different models that claim to be more predictive and consumer-friendly.

More than 100 stakeholders, including the Mortgage Bankers Association, had responded to a FHFA Request for Input issued as part of the Scorecard Initiative. And in August 2017, MBA and other industry trade groups sent a letter to Watt, urging FHFA to look beyond FICO in how Fannie Mae and Freddie Mac use scoring models.

However, Watt had signaled previously that a decision would not likely come before 2019, after the GSEs begin using the Single Security, a joint venture involving Fannie Mae, Freddie Mac and a newly created company, Common Securitization Solutions, to develop a single mortgage-backed security to be issued by the GSEs.

Watt said in 2017 that changes to the GSEs’ credit scoring models before 2019 would be a “serious mistake.” Yesterday’s announcement by FHFA would appear to re-emphasize that sentiment, even though prior to enactment of Section 310, FHFA had announced that it planned to issue a final decision in 2018.