The conservator and regulator of two influential government-related mortgage investors has announced a credit score other than FICO's "classic" metric can be used when submitting loans to them.
Effective immediately, Fannie Mae and Freddie Mac will allow lenders to use VantageScore 4.0, Bill Pulte said
The move, which Pulte said is "consistent with President Trump's landslide mandate to lower costs" challenges FICO, but it strengthens the position of three separate credit bureaus that provide mortgage-related reports and collaboratively formed VantageScore.
"We applaud Director Pulte's decision to allow the VantageScore 4.0 credit score for all Fannie and Freddie mortgages pursuant to the 2018 Credit Score Competition Act," said Silvio Tavares, president and CEO of VantageScore, in an emailed statement.
"Seven years ago, I led legislation that was signed into law to allow for the inclusion of alternative data sources like rent, utility, and telecom bill payments into credit scoring models. Under President Trump, FHFA Director Pulte is taking long-overdue action to lower costs and expand homeownership," Banking Committee Chair Sen. Tim Scott, R-S.C., said in a press release.
Pulte, who has said he plans to conduct
One concern raised by groups like the Community Home Lenders of America in response to an earlier Biden administration plan to lower costs by reducing the number of reports was the need to change industry operations that had been designed to accommodate three reports.
"FHFA Director Pulte's announcement of a tri-merge option to use Vantage Score is a win/win for both consumers and for lenders. CHLA has long advocated —
A group of Republican legislators
"As we continue to examine the full breadth of today's announcement, we thank Director Pulte for sending a strong signal that preserving safety and soundness means preserving the tri-merge. This is the right approach for homebuyers and taxpayers broadly," said Dan Smith, president and CEO of the Consumer Data Industry Association.
A more advanced credit metric like VantageScore's 4.0 is intended to bring in a broader range of data, resulting in a more sophisticated analysis of would-be borrowers' ability to repay in ways that could mean more people will be qualified for Fannie and Freddie's lower-rate loans.
"Modern credit scores like VantageScore that use both credit report data and alternative data, including rental payments, are long overdue for use in the mortgage industry. VantageScore has already been broadly adopted in other credit industries," Tavares said.
FICO also has an advanced score that Fannie Mae and Freddie Mac's regulator had planned to adopt prior to Bill Pulte's appointment to lead it.
The original X post announcing Fannie and Freddie's acceptance of VantageScore did not mention FICO. There was no immediate response to an inquiry sent to the Federal Housing Finance Agency, which Pulte
Pulte said in a subsequent X post Tuesday afternoon that his agency, Fannie and Freddie would be "incentivizing" lenders who use both VantageScore 4.0 and FICO.
"FICO welcomes competition on a level playing field among credit score providers," the latter company said in a statement. "We compete vigorously in every U.S. consumer credit market."
The company also noted that one of its advanced credit metrics that Fannie and Freddie have considered using also includes rental data and other features aimed at reaching the expanded group of borrowers Pulte has said Vantagescore 4.0 could help, such as people in rural areas.
(However, the two scores do have distinctions. One is that Vantagescore 4.0 qualifies more people because it requires less of a wait time for borrowers to build up credit history, something FICO considers insufficient when assessing the ability to repay.)
"FICO scores are the industry standard and preferred choice for evaluating creditworthiness in the mortgage process, regardless of whether the loan is conforming or nonconforming," FICO said. (Nonconforming loans are those funded outside the government-related market.)
The VantageScore announcement impact
FICO stock, which had been approaching $1,900 per share, had fallen more than 14% on the day at the time of this writing on Tuesday to a level closer to $1,700. It had dropped to a level as low as $1,500 in late May after
Share prices for each of the three major credit bureaus were generally higher on the day at deadline with Equifax up a little under 1%, Experian rising by more than 1%, and TransUnion increasing 3%.
"Director Pulte's comments demonstrate a commitment to responsible mortgage lending and preserving the best possible outcome for consumers," said Satyan Merchant, senior vice president, auto and mortgage, at TransUnion, in an emailed statement.
The extent of any cost savings from the two government-sponsored enterprises adopting VantageScore 4.0 will depend on how much competition they allow, said Curtis Knuth, president and CEO of Service 1st.
If lenders can choose between the new score and a comparable metric like FICO's 10T, and if advanced models make it safer to approve more of the borrowers they aim to serve, that competition could drive score prices down, he said.
"The cost of credit reports and scores has increased significantly over the last few years. The percentage increase is a point of concern for NCRA members, who are price-takers, not price-makers," said Eric Ellman, president and CEO of the National Consumer Reporting Association.
"However, the cost of credit information is still less than 1% of closing costs. The FHFA announcement could help curb or even reverse the cost increases," he added in an emailed statement.
NCRA, which represents resellers in the market, also supported the decision to maintain the tri-merge and more heavily consider rental payment information when qualifying borrowers.
"Data shows that when rent is included in a consumer's credit score, those with the most to gain gain the most," Ellman said, noting the move is one his group's members have advocated.
He also said NCRA has opposed a proposed move to a single credit report and to that end supports the retention of the tri-merge.
"The consideration of reducing three reports to just one credit report exposes lenders to increased risk. Increased lender risk was a contributing factor to the Great Recession of 2007-2009," Ellman said.
The National Taxpayers Union showed concern about the abrupt, informal announcement about a new score, noting that "consistently predicting lending risk in an unbiased manner are vital to protecting taxpayers from massive future bailouts" like the one in latter half the 2000s.
"The predictive models for the credit scores themselves, which should be subject to rigorous scrutiny and testing. We have warned policymakers — including Director Pulte's predecessor Sandra Thompson — to make sure accurate data supporting safety and soundness, rather than a particular policy outcome, drive the competition among credit scoring systems," NTU said.
"Director Pulte could provide great reassurance by issuing formal guidance with a request for public comment to explore the possible (but unconfirmed) change in direction," The union added.
(Pulte has said that he makes announcements about policy changes informally initially to provide transparency as quickly as possible. Formalized guidance has typically following at some point. Fannie and Freddie did not immediately respond to requests for this. The GSEs have done extensive testing and
A move away from a tri-merge would have had some operational complexities but the work involved in adding an advanced score is most likely to be contractual, Knuth said.
"I think for the most part the industry should be ready," he said. "Lenders that don't have experience with a new model are going to have to get it."
Housing and banking trade groups react
A quartet of housing and banking trade groups called Pulte's announcement "a promising first step," but otherwise urged caution in its adoption.
The Mortgage Bankers Association, American Bankers Association, Housing Policy Council and Structured Finance Association said the move meets their shared goal of having "a more efficient, more transparent, and more competitive credit scoring system."
But their concerns are not just with VantageScore 4.0, but also the FICO 10T model as well. The changes are "raising a number of implementation questions and concerns that the GSEs will need to address before they can take delivery of loans that rely on new scores…for pricing or eligibility."
Adding VantageScore into the mortgage ecosystem "will require the GSEs to provide lenders, investors, and other market participants critical implementation guidance.
"Our organizations stand ready to partner with the GSEs to resolve these questions quickly," the joint statement said. "Strong and fast collaboration between GSEs and industry stakeholders will be necessary to realize the vision of true competition for credit scores and lower costs for consumers."
- Additional reporting by Brad Finkelstein
