News that Fannie Mae and Freddie Mac are analyzing the costs of enabling use of up-to-date credit-scoring models based on post-recession data, including the VantageScore 3.0 model, has been getting a lot of attention.
So have the potential consequences, for the economy and for fairness in lending, of sticking with outdated scoring models.
Consider the recent entry in Kenneth Harney’s popular The Nation’s Housing column, widely syndicated online and in many of the country’s top newspapers. In the column, headlined “Flexible rules could extend mortgages to millions,” Harney discusses how GSE reliance on outdated credit score models freezes out large groups of potential homeowners, including significant populations of Hispanics and African Americans.
Equally relevant is a piece from BloombergBusinessweek, “Lending to Minorities Declines to a 14 Year Low in U.S.” The article covers recent data, collected in accordance with the Home Mortgage Disclosure Act (HMDA), that reveal a significant decline in the number of mortgage loans provided African-Americans and Hispanics. GSE reliance on older FICO models is cited as one reason for this, and usage of the VantageScore model is cited as a potential solution.
The issues raised in these articles make the decisions by Fannie Mae and Freddie Mac, to consider more up-to-date credit-scoring models, most welcome. An American Banker article, which also appeared in sister publication National Mortgage News, details the story. Headlined “Fannie, Freddie to Evaluate Alternative Credit-Scoring Models,” the article begins:
The government-sponsored mortgage giants, facing pressure to end their reliance on old credit-scoring models from Fair Isaac Corp., are working with their regulator to study newer alternatives.
It goes on to note that:
The commitment by the two housing giants marks a win for upstart VantageScore Solutions in its quest to compete against industry leader Fair Isaac Corp.
These articles come amidst a groundswell of activity urging the GSEs to revise their rules on acceptance of up-to-date credit-scoring models.
VantageScore Solutions welcomes the GSEs’ decision to evaluate the VantageScore model, and urges them to expand their rules to allow newer models from multiple vendors. Competition in credit scoring, as in other markets, encourages innovation and gives lenders the power to choose the scoring model, or models, that are perform best on their particular portfolios and target audiences.