In a rather surprising development, the Federal Housing Finance Agency announced Tuesday that it will allow Fannie Mae and Freddie Mac to consider using VantageScore as an alternative to their current FICO credit scoring model, a dramatic reversal from a proposed rule issued late last year.
In December, the FHFA issued a proposed set of rules surrounding the adoption of alternative credit scoring rules. Most notable among those proposed rules was a provision that would have prohibited 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. In recent years, VantageScore, with the backing of the Big 3, has pushed for the GSEs to explore alternatives to the classic FICO model.
The FHFA seemingly put a stop to that effort when it announced late last year that its 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 rule, if adopted as proposed, would have effectively blacklisted VantageScore from GSE consideration.
But Tuesday, the FHFA released its final rule on the matter, and missing from the rule was any mention of conflicts of interest or “credit score model developer independence,” meaning VantageScore is no longer subject to any potential blacklist and is back on the table for the GSEs.
The move is stark turnaround from the FHFA’s previous actions on the matter and is further proof that FHFA Director Mark Calabria is operating much differently than his predecessor, Mel Watt.
Last year, for example the FHFA all but ended 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 toward implementing the Economic Growth, Regulatory Relief and Consumer Protection Act, which passed into law in May 2018 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 GSEs 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 eventually shut down its exploration of pushing past the classic FICO model.
Or so it seemed…but a lot can change in a few months.
In its final rule, which can be read here, the FHFA states that it received feedback on both sides of the VantageScore issue, with some arguing that blacklisting VantageScore would not be in the spirit of the Economic Growth, Regulatory Relief and Consumer Protection Act, which dictated that the GSEs consider FICO alternatives.
Other feedback argued the other side, with some commenters suggesting that the credit score model developer independence stipulation is necessary to ensure fair competition.
Ultimately, the FHFA chose to remove the credit score model developer independence stipulation, stating that the rule was initially designed to protect against concerns that Equifax, Experian, and Transunion “lacked an incentive to support new entrants because of their ownership of VantageScore Solutions.” But in the FHFA’s view now, there are “many other factors that may affect the potential entrance of new credit scoring companies into the industry.”
According to the FHFA’s rule, the agency concluded that “allowing all credit score model developers to submit applications is more consistent with section 310, which does not prevent any credit score model from being considered for potential use in the mortgage market. Therefore, the final rule does not require a credit score model developer to provide a conflicts-of-interest certification with its application.”
But it’s not total smooth sailing for VantageScore either. The FHFA rule stipulates that the GSEs must consider whether the use of a particular credit score model “could have an impact on competition in the industry.”
Beyond that, the GSEs “must consider whether such impact is due to any ownership or other business relationship between the credit score model developer and any other institution,” the FHFA said.
“One of my priorities is to ensure that the American people have a safe and sound path to sustainable homeownership, which requires tools to accurately measure risk,” Calabria said in a statement. “The final rule we are publishing today is an important step toward achieving that goal.”
As one might imagine, VantageScore is thrilled with the FHFA’s rule change.
“After a 13-year campaign, VantageScore Solutions is pleased that the FHFA has responded to the Congressional directive contained in Section 310 of the Economic Growth, Regulatory Relief, and Consumer Protection Act and revised its initial proposed rules on credit score model competition for the mortgage sector in a manner consistent with that law,” Barrett Burns, president & CEO of VantageScore Solutions, said in a statement provided to HousingWire.
“We are grateful to FHFA, Senator Tim Scott and former Rep. Ed Royce, the principal authors of the law, along with the many bipartisan Congressional cosponsors and supporters not just on Capitol Hill but also the many consumer, civil rights, industry and other groups that worked to see the legislation enacted that directed FHFA to implement these new rules,” Burns continued.
“With these new rules in place there now is a viable pathway for VantageScore and other new and innovative model developers to compete and elevate the predictiveness and inclusivity of credit scoring models required by the two GSEs,” Burns concluded. “Competition is critical for markets to operate efficiently and we are confident this decision will benefit consumers, lenders and the economy at-large.”
Outside of the changes surrounding VantageScore, the FHFA rule lays out a four-phase process for the GSEs beginning to use an alternative credit scoring model:
- Solicitation of applications from credit score model developers
- Submission and initial review of submitted applications
- Credit score assessment
- Enterprise business assessment
The rule also establishes an “aggressive” timeline for the GSEs to receive and consider new credit score proposals.
From the FHFA:
Each Enterprise is required to submit its initial credit score solicitation to FHFA within 60 days of the effective date of the final rule. FHFA will review and approve each Enterprise’s solicitation within 45 days. The Enterprise will then publish its solicitation for at least 90 days prior to the start of the solicitation period (a future date determined by FHFA). This is to ensure that applicants have sufficient time to understand the Enterprise application requirements and validation and approval process prior to submitting their applications. Finally, the initial solicitation period for application submission will be open for 120 days.
From there, the GSEs would have a 180-day period to “assesses each credit score for accuracy, reliability, and integrity outside of the Enterprise’s business systems.”
Then, the GSEs would have 240 days to assess each credit score model in “conjunction with the Enterprises’ business systems that condition the purchase of a mortgage loan on a borrower’s credit score. The Enterprise business assessment would evaluate accuracy and reliability within the Enterprise systems, impacts on fair lending, possible competitive effects from using a particular model, an assessment of the model provider as a potential vendor, the impact to the mortgage finance industry, and the impact on the Enterprises’ operations and risk management.”
If a credit score model passes muster in all of those processes, the FHFA will have 45 days to approve the use of said model, whatever it may be.
All in all, the FHFA anticipates the process of approving an alternative credit score model will take as many as 26 months.
But that doesn’t include the implementation of any approved model for use by the GSEs. The FHFA said that that process will likely take as much as two more years beyond that.
“FHFA believes, based on years of related credit score work, that it will take the industry approximately 18-24 months to adopt a new credit score model after a model has been approved by an Enterprise,” the FHFA said.
Add it all up and it’s looking like it will be at least four more years until the GSEs can use a different credit scoring model, whether it’s VantageScore or something else.
As for FICO, the company said it is looking forward to working with the GSEs and the FHFA on this new process.
“FICO has always supported a competitive review of credit scoring models by the FHFA. We applaud the FHFA for finalizing a rule that puts in place comprehensive, transparent requirements for the validation and approval of credit score models by the GSEs, and we look forward to continuing to work with them throughout this process,” Joanne Gaskin, FICO’s vice president of scores and analytics.
“In implementing the rule, we are confident that the FHFA and GSEs will endeavor to create a level playing field to ensure that no owner of consumer data necessary to underwrite a mortgage will impair market access of any independent credit score provider,” Gaskin added. “The FICO Score has been the industry standard for credit scores for decades because it is trusted by lenders to be independent, predictive and reliable, and we are confident that it will remain the superior choice by any measure established by the GSEs.”