As promised in the opening letter to last month’s issue of The Score, I want to share some exciting news about a new bill that has been introduced in Congress, which supports competition in the credit scoring industry, and some exciting news coverage of that proposed legislation.
In December, Representatives Ed Royce (R-CA) and Terri Sewell (D-AL) introduced the “Credit Score Competition Act of 2015.” This bipartisan bill would require Fannie Mae and Freddie Mac (the GSEs) to “establish procedures by which any developer can submit a credit scoring model for validation and approval for use in underwriting residential mortgage loans the GSEs are considering for purchase.”
The bill would also require the GSEs to incorporate credit scores derived from all validated and approved credit score models—including VantageScore models—in their automated underwriting systems, and any other processes or systems by which they purchase residential mortgages.
In other words, the “Credit Score Competition Act of 2015” would allow mortgage issuers and the GSEs to use the most advanced credit scoring models, from multiple developers, for automated underwriting. That’s a stark contrast to the current situation, which mandates one scoring brand, and its three decade-old, pre-recession models, for use in the GSEs’ automated systems. Those outdated models were built on data from 1995 to 2000, depending on the model.
We support the Act, and its goal of enabling lenders to choose which credit scoring model they would use when submitting loans for automated GSE approval. We are sure competition among scoring-model developers will spur greater innovation in the mortgage space, much as it has in other lending segments. We are equally certain that the use of the VantageScore 3.0 model would extend mainstream mortgage access to millions of consumers who are not scoreable using traditional credit scoring models.
The bill sparked several positive news articles and analyses. In one, by Ben Lane of HousingWire.com, Congressman Royce characterized GSE acceptance of credit-scoring competition as both a matter of fairness and an important step toward lowering risk.
“The GSEs’ use of a single credit score is an unfair practice that stifles competition and innovation in credit scoring,” Royce said. “Breaking up the credit score monopoly at Fannie and Freddie will also assist them in managing their credit risk and decreases the potential for another taxpayer bailout.”
In another article, by syndicated columnist Kenneth Harney of The Washington Post, Congresswoman Sewell is quoted addressing the enormity of the GSEs influence on U.S. homeownership, and the impact of their current reliance on outdated credit scoring models:
“Fannie Mae and Freddie Mac are the largest mortgage purchasers in the nation, but they rely on credit-score models that don’t necessarily take into account something as simple as whether borrowers have paid their rent on time. Homeownership is an integral part of the American Dream that shouldn’t be out of reach for low-income, rural and minority borrowers who lack access to traditional forms of credit.”
Perhaps our favorite coverage of the proposed legislation comes in the form of a forecast from the personal-finance website WalletHub.com. The final entry in its list of 10 financial predictions for 2016 is headlined Fannie & Freddie will say farewell to FICO:
Like anyone who survives a near-death experience, Fannie Mae and Freddie Mac are reassessing things and set to make some important changes. … That is why recent momentum in the push to modernize the pair’s approval guidelines is a positive development for consumers. If passed, the bipartisan Credit Score Competition Act of 2015, introduced December 10, would allow Fannie and Freddie to consider alternative scoring models – perhaps most notably the VantageScore credit score offered by the three main credit bureaus. This bill has only a 4 percent chance of being enacted, according to GovTrack.us, but we’re betting that the combination of public pressure, rare bipartisan support and the fact that Fannie and Freddie need to tread carefully with members of Congress will result in changes being made.
That’s a prediction we can stand behind, and one we will work hard to make come true in 2016.
All the best for a great New Year,