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Mortgage

FHFA shelves search for new Fannie, Freddie credit score model

FICO wins… for now

FICO and its competitor, VantageScore, have been held in suspense to see which credit score model, if any, the Federal Housing Finance Agency will choose to use going forward.

Back in December, the agency requested input from interested parties on a possible change to its credit scoring models. The credit score models being analyzed are Classic FICO, FICO 9 and VantageScore 3.0. This search first began nearly four years ago when Freddie Mac first told HousingWire the GSEs were looking into alternatives to FICO.  

There are also several scenarios Fannie Mae and Freddie Mac could use including choosing just one score model out of those mentioned above, requiring both FICO 9 and VantageScore 3.0 on every loan, lender choice on which score to deliver or allowing for the delivery of a primary and secondary credit score. To read more about those choices, click here.

But now, the FHFA announced it is postponing its decision and will instead be shifting its focus to implementing the Economic Growth, Regulatory Relief and Consumer Protection Act, which passed into law in May.

The act requires FHFA to define, through rulemaking, the standards and criteria the government-sponsored enterprises will use to validate credit score models.

Previously, the FHFA had announced it would make its final decision on credit scoring models in 2018, however now, that decision could be delayed as far out as 2020.

While the act does not give a clear deadline for approving a new credit score model, they can use the current credit score model until November 20, 2020, the FHFA told HousingWire.

“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,” FHFA Director Melvin Watt said. “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.”

“These steps include developing a proposed rule, receiving and evaluating public comment on the proposed rule and issuing a Final Rule to govern the verification of credit score models,” Watt said. “Thereafter, we will follow through on the steps required to implement the new Rule.”

Because the GSEs currently use FICO’s credit scoring model, this new decision means the company will continue to dominate the mortgage credit market, for now.

But not only will it mean that the GSEs continue to use FICO, it also means they will continue using an older version of FICO, which many argue keeps the credit box tight, and does not consider as many factors as newer credit scoring models.

Many mortgage lenders have expressed their frustration with the current outdated model, and their wish to be able to choose which credit scoring model they submit. Read more about that, here.

However, others are concerned that allowing for more than one model could lead to credit scoring companies fighting to give lenders the best score, rather than an accurate reflection of the borrower’s credit.

Whatever conclusion the FHFA comes to, it will not be happening anytime soon.

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