The Federal Housing Finance Agency announced Monday it is postponing its search for alternative credit scoring models, but both FICO and VantageScore expressed their disappointment with the agency’s decision.
The FHFA announced it is postponing its decision for a new credit score model for Fannie Mae and Freddie Mac, and will instead be shifting its focus to implementing section 310 of S. 2155, the Economic Growth, Regulatory Relief and Consumer Protection Act, which passed into law in May.
The credit score models being analyzed were 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.
And while FICO and VantageScore have been locked into an intense competition while the FHFA makes its decision, they both agreed on one thing – the postponement is disappointing.
“After five years of examination and three years of inclusion in its 2018 GSE Scorecard, it is disappointing to learn that FHFA will not meet the deadlines prescribed by Congress to implement a system that will bring the benefits of competition to the mortgage market,” VantageScore President and CEO Barrett Burns told HousingWire. “Model validations and an industry comment period have already occurred and therefore FHFA should move ahead more expeditiously.”
“With every day that passes, mortgage applicants are mispriced, locked out and discouraged from pursuing homeownership,” Burns said. “We look forward to continue working with the FHFA and the Enterprises to implement more modern, precise and inclusive scoring models consumers deserve.”
FICO also expressed its disappointment, calling the delay “unfortunate.”
“It is unfortunate there’s been a delay to the review process,” Joanne Gaskin, FICO senior director of scores and analytics said in a statement to HousingWire. “We continue to support a competitive review of credit scoring and plan to actively participate in the new FHFA credit score application process, to ensure that lenders, consumers and taxpayers benefit from the independence, reliability and innovation that the FICO Score provides.”
But while it may be upset over the delay in choosing a new credit scoring model, VantageScore expressed its full support for S. 2155. Back in June, Burns wrote a blog outlining the company’s support for the newly passed legislation.
“This a great win for consumers, lenders, competition and, yes…for VantageScore as well,” Burns wrote. “All we ever wanted was the opportunity to compete with FICO on a level playing field and on the basis of how well our models perform.”
“I firmly believe that we’ll see new model developers enter the competition as well,” he continued. “With this legislation now signed into law, we are one giant step closer to making that happen in the mortgage market.”
The act requires FHFA to define, through rulemaking, the standards and criteria the government-sponsored enterprises will use to validate credit score models.
And indeed, the new law does call for the establishment of a validation process for multiple credit score models. Under section 310, Credit Score Competition, the law states that, “The corporation shall establish a validation and approval process for the use of credit score models.”
Depending on how the FHFA chooses to interpret the law going forward, it could allow for new competition and new entrants into the credit scoring market.
And even one of the senators responsible for pushing the act through Congress, Sen. Tim Scott, R-S.C., agreed that the current mortgage credit system needs more competition, and said the credit section of the act was designed to bring just that.
“The legislation has the word ‘competition’ in its title, and that’s the key: It was my intent that multiple, statistically sound credit scoring models could be used by the GSEs,” Scott said.
So while the delayed decision could mean FICO retains the monopoly on credit scoring for the GSEs for a while longer, ultimately, this law could soon allow for new entrants into the space.
The FHFA could also still choose from one of the original options was looking at. At this point, it’s anyone’s guess. But for now, the GSEs will continue to use 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.
Back in April, Gaskin wrote that, “The provision in the Senate legislation circumvents the FHFA’s current review process, which is nearing completion, and instead significantly delays any decision to update the scoring model used for conforming mortgages.”
Although the FHFA was nearing a conclusion, with expectations to announce its decision in 2018, its new shift in focus puts the process back in the beginning stages, and there is no clear deadline for when a new credit scoring model will be chosen.