Members of the U.S. House of Representatives took the opportunity during a hearing this week to ask Federal Housing Finance Agency (FHFA) Director Sandra Thompson about a proposed change to the FICO Classic credit model, inquiring about the potential impacts on credit availability and mortgage financing for constituents.
The FHFA announced in October 2022 that it is replacing the Classic FICO credit model that Fannie Mae and Freddie Mac use with the FICO 10T and the VantageScore 4.0 credit score models and outlined the timeline for implementation.
There are also plans in place for the government-sponsored enterprises (GSEs) to transition to two credit reports from the national consumer reporting agencies within a year, as opposed to three, in an approach called “bi-merge” rather than “tri-merge.”
During the House Financial Services Committee hearing on Tuesday titled “FHFA Oversight: Protecting Homeowners and Taxpayers,” Thompson was asked about the proposed bi-merge change by members who expressed concern about potential impacts on people in their districts.
“My small community banks and credit unions, including those in rural Iowa, often only report data to one credit reporting agency,” said Rep. Zach Nunn (R-Iowa). “Under the bi-merge standard, two consumers who have similar credit profiles could potentially get differently-priced mortgages depending on which two reports are pulled, which mortgage lender end consumers choose, and which or how many mortgage lenders they have access to, depending on where they live.”
Rep. Nunn cited an example of how urban borrowers in Des Moines are likely to have vastly different reports from more rural borrowers in Bedford, and asked how FHFA plans to ensure equal access to mortgage financing — regardless of where borrowers live and how they apply.
“We believe after analysis that moving from three credit scores to two is going to be beneficial for the borrowers, and it will encourage competition from the credit reporting agencies,” Thompson said. “And it would lower costs for the borrowers because instead of three credit reports, they only pull two, and then the lender picks which two those are. Right now, we’re working through the process with the GSEs on trying to figure out whether or not there is going to be the median or the average.”
Under the tri-merge system, the median between the three scores is taken, Thompson said. Stakeholder conversations could see that change from the median or the average once the shift to a two-report system is implemented.
“One of the things that has concern here is that the FHFA is asking for more data, specifically related to those mortgages, but at the same time excluding some information from the mortgage process,” Nunn said.
Rep. David Scott (D-Ga.) also asked about the proposed move, but voiced concern regarding the consideration of positive credit history after the transition to a bi-merge model is complete.
“My concern is that by removing one of the reports from a lender’s review, FHFA is potentially leaving predictive and positive credit history out of the credit risk assessment,” Rep. Scott said. “And while I agree that we need more competition between the three nationwide credit reporting agencies, I have concerns that this action could have serious implications for consumers planning to purchase a home.”
Rep. Scott also asked Thompson why the move would be more sustainable, which is how the FHFA previously characterized the change, according to Scott. Thompson noted that a major factor for this proposed change is the evolution of the modern lending ecosystem.
“Years ago, there were three separate credit reporting agencies, and they had special information about certain parts of the country,” she said. “Having said that, we’ve made several advances in technology, and now there’s national lending. And we currently require the enterprises to get credit scores from all three companies, and you have to pull a credit score for every borrower on the loan.”
The FHFA conducted a review of the material impact on credit scores that moving from tri-merge to bi-merge would have, and found that while moving from three agencies to one had a significant impact, moving from three to two had little discernible effect on the resulting scores, according to Thompson.
“The accuracy is not impacted very much, if at all, moving from three to two and we do believe that that will foster competition [between the credit reporting agencies],” Thompson said. “With regard to including positive rental payments, that is something that’s going to be — and currently is included — in underwriting systems for both Fannie Mae and Freddie Mac. If people report these positive payments, they are included, and they get factored into the crediting decisions.”