Lenders look at operational changes in credit score update

A lot of the debate regarding credit score modernization has focused on the actions of, and comparisons between FICO and VantageScore. Representatives of both were on a panel on the topic at the Mortgage Bankers Association's Secondary and Capital Markets Conference in New York.

But the session also featured two lenders in the midst of the change, Guild Mortgage and NewRez. The operational changes to accommodate the new models are among their key concerns.

The lenders themselves were not allowed to share specifics by the government-sponsored enterprises about the rollouts.

This being said, having updated scoring models is appealing in terms of having a better measurement of risk in originations, and in valuing mortgage servicing rights, said David Battany, executive vice president, capital markets, at Guild.

"The accuracy and quality of those scores is important, and so we look at both of these new models coming out as new updated models that are very much worth evaluating," Battany said. "The way you do that is you start to collect data, and you can compare how the same loan would score across all three models." Those would be the current FICO Classic model in use, as well as FICO 10T and VantageScore 4.0.

It is important for lenders to understand the risk correctly for each model, whether it is for a loan they originate and face buyback risk on, or one they service and the foreclosure risk, Battany said.

NewRez, which did a securitization with Freddie Mac as part of a pilot, had "the common goal of seeing if it could work, and how we leverage those loans, how we would underwrite those loans, how we would pull the credit," said Bob Johnson, head of originations. "Really going for a full performance test is important to us, and obviously important to Freddie Mac, and at the end, everything went easier, smoother than I thought it would go."

Operationally, a lot of what needed to be done during the process was "technology-related obviously," Johnson said. Things like having to add new fields for the new scores so both models can be housed within your system.

NewRez has an advantage because it owns its loan origination system and can make the changes itself and not have to wait on a vendor.

In this process, it found credit scores are "something that touches so many different parts of our organization, and going through that process, we really learned about how much work there is involved in making a change like this that had never really happened before," Johnson said.

Lenders must "look around the corners and understand what you know what's going to take to make changes," he continued.

The situation also raises the question of how lenders are going to behave in the future if they have two different models. Does the lender pick a favorite, Battany asked rhetorically, following it up with, how did they choose the model, and was it because the investor let them cherry-pick?

He framed it as the industry is in the early stages of learning how to compare the models to each other and the various pros and cons.

"We're all starting again, looking kind of into the unknown of how to think about these three models compared to each other," Battany said.