Bipartisan Senate bill would force Fannie, Freddie to think outside FICO

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WASHINGTON — A bipartisan duo of lawmakers is set Tuesday to introduce a bill designed to increase homeownership opportunities for “credit invisible” consumers.

Sens. Tim Scott, R-S.C., and Mark Warner, D-Va., are co-sponsoring the measure, which would require the regulator of Fannie Mae and Freddie Mac to direct the government-sponsored enterprises to accept new credit scoring models.

“I'm focused on encouraging sustainable homeownership over a simple homebuyership. One way to do so is the [Federal Housing Finance Agency] updating the accepted credit scoring models of the GSEs,” Scott said at a Senate Banking Committee hearing last month. “If a family pays their utility bills or their phone bills on time for a decade, it ought to count towards their ability to have a home.”

The GSEs currently rely on FICO for credit scoring, which means borrowers must meet certain requirements in order to have their mortgage purchased by Fannie and Freddie.

But FICO’s methodology doesn’t account for every consumer, and roughly 26 million Americans are considered “credit invisible.” Using an alternative model that tracks other sources of payment history could give consumers the chance to develop a credit score that would enable them to take out a mortgage, for example.

The legislation being introduced would create a process where those alternative credit scores could be used by the GSEs.

The FHFA has been working with Fannie and Freddie while studying alternative credit scoring models, but validating whether a model consistently predicts a borrower’s credit worthiness is challenging.

FHFA Director Mel Watt said late Tuesday that the GSEs will not adopt alternative credit scoring methods until 2019 at the earliest, saying other issues must be resolved first.

Some financial industry representatives have also raised concerns about introducing new credit scoring models.

“Adding more credit scoring models to the market would require some data validations … time periods that adds costs,” Brenda Hughes, senior vice president at the $624 million-asset First Federal Savings Bank of Twin Falls in Idaho, said during testimony at a Senate Banking Committee hearing last month.

Yet the bill being introduced on Tuesday has broad support from the housing industry, including the large and small lender trade associations, the National Association of Realtors and consumer advocates groups like the National Fair Housing Alliance and civil rights groups including the NAACP. It is also supported by the National Association of Federally-Insured Credit Unions.

In testimony last month, Charles M. Purvis, president and CEO of the $2.9 billion-asset Coastal Federal Credit Union in Raleigh, N.C., said he backed such a measure.

“We think it's very important for them to begin updating their credit models to take advantage of those other sources, which we think will widen the net of folks who become eligible for conforming mortgages” purchased by Fannie and Freddie, said Purvis.

The banking panel is in the process of crafting legislation to reform the housing finance system and end the 2008 conservatorship of Fannie and Freddie.

In an interview on Tuesday, Scott said that using other types of data and models to determine borrower credit worthiness has been a part of those conversations.

“We have had a conversation with” panel chairman Sen. Mike Crapo, R-Idaho, and the top Democrat, Sen. Sherrod Brown, “about updating the credit scoring,” Scott said.

The South Carolina Republican said the bill would provide a simple fix and should be able to pass as a standalone bill, but may ultimately be part of a larger housing finance reform package.

In a separate interview, Brown said that it has taken time to get new panel members and staff up to speed with the complexities of housing finance reform but that he is hopeful the panel “can move forward” with legislation soon. He also expressed similar concerns about consumers getting left out of the mortgage market.

“Providing financing for more middle-income people who can pay their mortgage is so important," Brown said, "because there is such a terrible housing shortage for moderate-income people.”

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