FHFA would ban VantageScore from Fannie Mae, Freddie Mac credit scores

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WASHINGTON—The Federal Housing Finance Agency has proposed barring Fannie Mae and Freddie Mac from using credit scores developed by VantageScore over concern about conflicts of interest with the joint venture of Equifax, Experian and TransUnion.

The proposal is a blow to nonbank lenders that argue greater competition with FICO scores would safely open up the mortgage market to borrowers with limited credit histories.

In proposing a process to approve providers of alternative credit scores for use by Fannie Mae and Freddie Mac, the FHFA would also prohibit credit score models from any company that is connected with a consumer data provider, according to the agency's notice of proposed rulemaking.

The three major credit bureaus co-own VantageScore. In a request for input the agency put out last year, commenters expressed concern that the company's joint ownership by three nationwide credit reporting agencies would give them a competitive edge, the FHFA said.

"Although the proposed prohibition could limit the number of possible credit score model developers that would be able to submit an application, it would ensure that any approved credit score model would not unfairly benefit the institution that developed the credit score model," the agency said in its proposal.

The FHFA also emphasized that under this rule, even a company with a minority ownership interest would be banned from use by the government-sponsored enterprises. This would also bar the use of credit score models developed by both FICO and a credit reporting agency, such as the Beacon Score created by FICO and Equifax.

The agency's argument lines up with that of banks, which generally are in favor of the agency continuing to use the FICO model, claiming that allowing the GSEs to use alternative credit score providers would open them up to riskier borrowers. FICO scores are known to be more conservative than other models.

But nonbank lenders contend other credit score models would open up the mortgage origination market to a new pool of consumers and make getting a mortgage more accessible.

VantageScore Solutions President and CEO Barrett Burns suggested the agency's proposal would make FICO a monopoly by rendering its 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," he said in a statement. "Should the rule stand, the federal government would be picking winners and losers to the detriment of millions of consumers."

At the core of the FHFA's proposed rule is a four-step process for the GSEs to follow while validating a third-party credit score model: the solicitation and review of applications, followed by a credit score assessment and an enterprise business assessment.

A credit score assessment would require Fannie and Freddie to assess the "accuracy, reliability and integrity, independent of the use of the credit score in the Enterprise's systems," the FHFA said. During an enterprise business assessment, the GSEs would review the credit score model in conjunction with its systems.

"Although Classic FICO remains adequate for Enterprise purposes, FHFA has acknowledged potential benefits of the Enterprises using more recently developed credit score models," the agency said in its notice of proposed rulemaking.

A section of the regulatory reform bill signed by President Trump in May required the FHFA to define the standards and criteria Fannie and Freddie would use to validate credit scoring models.

Before the law passed, more than 100 stakeholders had responded to a request for feedback on the agency changing credit score models, with many arguing that the operational challenges would outweigh the benefit of using a different model, the FHFA said in its proposal.

"Changes to Enterprise credit score requirements could have widely-felt implications for borrower access to credit, origination costs in the primary mortgage market, the ability to fully analyze and properly price mortgage credit risk and liquidity in the secondary mortgage market," said one respondent, whom the FHFA quoted in its proposal.

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