Anyone hoping that Fannie Mae and Freddie Mac may soon start using VantageScore as an alternative to their current FICO credit scoring model is about to get a cold dose of reality.
The Federal Housing Finance Agency announced this week that it is issuing new rules surrounding the adoption of alternative credit scoring rules, just as it said it would earlier this year.
Chief among those rules is a provision that would prohibit the government-sponsored enterprises from using the VantageScore credit scoring model because of conflicts of interest with the company’s backers.
VantageScore Solutions, the developer of the VantageScore credit scoring model, is a joint venture between the nation’s three largest credit bureaus, Equifax, Experian, and Transunion. And in recent years, VantageScore, boasting the backing of the Big 3, has pushed for the GSEs to explore alternatives to the classic FICO model.
Earlier this year, the FHFA threw a large bucket of cold water on the idea of moving beyond the current FICO credit scoring model used by Fannie Mae and Freddie Mac by stating that it was ending its review of potentially adding alternative credit scoring models to the mix.
At the time, the FHFA said that it planned on shifting it focus towards implementing the Economic Growth, Regulatory Relief and Consumer Protection Act, which passed into law in May and requires the regulator to establish rules, standards, and criteria that the government-sponsored enterprises will use to validate credit score models.
The move came after several years of the government-sponsored enterprises looking at alternative models, but despite requesting input from interested parties on a possible change to its credit scoring models and even extending the deadline for feedback, the regulator shut down its exploration of pushing past the classic FICO model.
Now, the FHFA has issued its rules for choosing alternative models, but the rules do not allow the GSEs to use VantageScore, because of its relationship with the credit bureaus.
“The proposed rule would prohibit an Enterprise from approving any credit score model developed by a company that is related to a consumer data provider through any common ownership or control,” the FHFA said in its rule breakdown.
“The proposed rule also would require an Enterprise to consider potential conflicts of interest and competitive effects in assessing the costs and benefits of approving any credit score model,” the FHFA continued.
“Competition concerns may arise if a credit score model developer is owned by or affiliated with an institution that may have a conflict of interest. For example, this could include a credit score model developed by an institution that controls the data used to develop the credit score model, or it could include a credit score model developed by a lender for use in its own systems,” the FHFA added.
The FHFA stated those stipulations in a section titled “credit score model developer independence.”
And that rules out VantageScore, which, as one might imagine, was rather unhappy with the news.
“Last year, FICO imposed a historic price increase on mortgage borrowers for a scoring model approaching twenty years old. That is the essence of monopolistic behavior and control,” Barrett Burns, president and CEO of VantageScore Solutions, said in a statement provided to HousingWire.
“Director Watt’s proposed rule would perpetuate and strengthen that monopoly by ruling all of FICO’s current competitors “ineligible.” Simply put, the language is not reflective of the intention and desire that Congress had when it passed the credit score competition provisions of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018,” Burns continued.
“Should the rule stand, the federal government would be picking winners and losers to the detriment of millions of consumers,” Burns concluded. “We look forward to providing commentary and working with the new incoming Director of FHFA. We presume that the next Director will share Congress’s desire for a competitive and fair credit scoring market.”
As Burns noted, there will soon be a new director of the FHFA, as Mel Watt’s term will soon end.
And whether it’s Mark Calabria on a permanent basis or someone else from the Trump administration on a temporary basis, VantageScore is hoping for a different perspective on alternative credit score models.
As for the FHFA’s rules themselves, they address the process for the GSEs to choose an alternative credit scoring model (outside of using VantageScore, of course).
Specifically, the proposed rule establishes a four-part process for one (or both) of the GSEs to approve a new credit score model:
- Solicitation of applications from credit score model providers
- Review of submitted applications
- Credit score assessment
- Enterprise business assessment
You can read more about each of those phases and what they mean here, but the FHFA states that the approval process itself could take more than two years. Beyond that, the FHFA said that it believes it will take the industry approximately 18 to 24 months to adopt and implement a new credit scoring model after a model has been approved by one of the GSEs.
Add that up and full implementation of new credit score model could take as much as four years. Given that timeframe, it looks like the classic FICO will be use by the GSEs until at least 2022.