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Senate to consider bill to end “FICO monopoly” at Fannie Mae and Freddie Mac

Bipartisan push continues to allow GSEs to use alternative credit scoring models

Earlier this year, a bipartisan group reintroduced a bill in the House of Representatives that would allow Fannie Mae and Freddie Mac to consider alternative credit-scoring models beyond the FICO credit score the government-sponsored enterprises currently use.

The bill, called the “Credit Score Competition Act,” enables the GSEs to consider alternative credit scoring models when determining credit worthiness.

Now, a companion bill is being introduced in the Senate as well, with the backing of Senators from both parties.

The Senate version of the “Credit Score Competition Act” is sponsored by Sens. Tim Scott, R-South Carolina, and Mark Warner, D-Virginia.

In a joint statement, Scott and Warner say that the bill will help make credit available to “ some of the 26 million ‘credit invisible’ individuals in the housing market.”

According to the Scott and Warner’s statement, the “Credit Score Competition Act” directs the Federal Housing Finance Agency to create a process that would allow alternative credit scoring models to be validated and approved by Fannie Mae and Freddie Mac when they purchase mortgages.

“Currently, the GSEs are mandated to consider a decades-old credit scoring model that does not take into account consumer data on rent, utility, and cell phone bill payments,” Scott’s office said in the statement. “This exclusion disproportionately hurts African-Americans, Latinos, and young people who are otherwise creditworthy.”

Scott also raised the issue during a Senate Finance Committee hearing this week, entitled “America’s Affordable Housing Crisis: Challenges and Solutions.”

During the hearing, Scott asked Granger MacDonald, the chairman of the National Association of Homebuilders, about the limitations of the FICO scoring model that the GSEs currently use.

MacDonald said that the FICO model the GSEs use is confusing not only to consumers, but to the industry as well.

“(Credit scoring models are) an issue that has been at the forefront of homebuilders for quite some time – probably since ’08 when the downturn in the economy came  and we were trying to find out why all of a sudden we were having so many prospective homebuyers who were losing the opportunity to purchase homes,” MacDonald said during the hearing. “And we sat down with our economics department – and we have 4 or 5 of the smartest PhD’s I’ve ever met in my life – and we said, ‘Tell us how FICO works.’ Sir, after about 30 days they came back and they couldn’t figure it out.”

MacDonald said that the GSEs need to use a system that’s “transparent” so that all consumers know how their credit score is derived.

“So you know what to do and how to improve it. How to work with it. How to work toward having good credit,” MacDonald said. “Good credit shouldn’t be an accident it should be something you work at as a goal and if you understand the rules that you’re playing by its a lot easier to play the game.”

Video of that exchange is below, shared by Scott on Twitter.

“After growing up in a small, two-bedroom house with my grandparents, I came to understand and appreciate the independence that comes with the notion of owning a home,” Scott said in a statement.

“Homeownership is a huge part of the American Dream, and I want to help folks across the country accomplish that goal. The current credit scoring model at the center of our housing market overlooks a large swath of people that are paying their monthly bills on time and deserve an opportunity to pursue homeownership,” Scott said. “This is an opportunity to make our system more fair for everyone without lowering the bar for qualification.”

Warner said that the bill can help increase homeownership among groups that are currently being left behind.

“There are millions of Americans who pay their rent, utilities, or cell phone bills on time, yet aren’t considered ‘credit-worthy’ under federal housing finance standards because they lack access to traditional lines of credit, such as auto or student loans,” Warner said.

“These ‘credit invisible’ Americans are disproportionately young, new Americans or people of color. Our goal in introducing this legislation is to encourage Fannie Mae and Freddie Mac to consider more inclusive methodologies in determining a borrower’s creditworthiness,” Warner added. “Alternate scoring models have the potential to make homeownership a reality for more qualified borrowers who lack access to traditional forms of credit.”

Unsurprisingly, Barrett Burns, the president and CEO of VantageScore Solutions, a direct competitor of FICO, welcomed Scott and Warner’s bill.

“Along with a broad coalition of housing and business advocates, we support and applaud the leadership of Senators Tim Scott and Mark Warner who today introduced the bipartisan Credit Score Competition Act in the United States Senate,” Burns said in a statement.

“No single company should have a government-sanctioned monopoly, especially when there are millions of consumers that are negatively impacted. Infusing competition into this integral area will improve fairness, transparency, and inclusiveness without compromising on standards,” Burns said. “Allowing each lender to choose the credit scoring model best for its business is in the short- and long-term best interest of the housing finance industry and the consumers they serve.”

[Update: This article is updated with the correct spelling of VantageScore Solutions CEO Barrett Burns' name.]

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