While the topic of credit reports and credit scoring remains a focus for several federal agencies, a major decision by the Federal Housing Finance Agency (FHFA), stemming from a 2019 final rule regarding the modeling of credit rating, looms. The FHFA’s new scoring models may require Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs), which have used the classic FICO credit score since 2003, to consider several new credit models and alternative data. Depending on what the FHFA decides, this could have huge regulatory implications for lenders, mortgage insurers, mortgage originators, mortgage-backed securities, credit risk transfer investors and technology providers, as well as consumers.
In early March, the FHFA hosted a credit score model listening session on this topic. The various scoring model ideas included as part of the discussion were prompted by a directive from Congress in Section 310 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 and the FHFA has been working on this issue for several years. During the debate on this legislation, it was debated whether rent, utility and mobile phone payments were properly taken into account and whether there was a need for additional data. Notably, FICO has several new credit scoring models that would include additional information, but also pointed out that their original model takes this information into account as well. Credit bureaus have also developed VantageScore, a credit scoring model.
The FHFA announced a four-phase process to consider a new model and four options:
(1) Single Score: GSEs require delivery of a single score of either FICO 9 or VantageScore 3.0, if available, on each loan;
(2) Require both: GSEs require delivery of both scores, if available, for each loan;
(3) Lender choice: GSEs would allow lenders to lend with either score, when available, with certain constraints such as the use of a score or the another for a defined period of time; and
(4) Waterfall: GSEs would deliver multiple scores through a waterfall approach that establishes a primary credit score and a secondary credit score.
After the listening session, the FHFA is expected to make decisions on next steps by the end of the year, then begin a process that could take about two years or more to make the changes. This has been an ongoing project for several years.
Other corresponding agency and administrative activity
In recent years, consumer groups, during discussions regarding the new FHFA scoring model, argued that medical debt should either have less weight or be eliminated altogether. Notably, some models, including FICO 9 and VantageScore 3.0, reduce medical debt score and remove paid debt. As we recently reported, Equifax, Experian and TransUnion have announced major policy changes regarding medical debt reporting and the Consumer Financial Protection Bureau (CFPB) has been active in this area. In testimony before the House Financial Services Committee on April 26, CFPB Director Rohit Chopra said, regarding medical debt on credit reports, that he was not sure “s ‘it is appropriate to include this information at all’, which has raised questions about whether the agency will take action in this area.
The White House has also advocated for a one-size-fits-all treatment of medical debt for credit reports.
Additionally, student loan debt remains at the top of the administration’s agenda and could also be part of any discussion in the coming months as credit modeling and scores are overhauled. Most recently, on April 19, the US Department of Education (DOE) announced further actions it planned to take regarding student loans, hinting that there were more to come.
Impact on lenders
During FHFA’s March listening session, groups representing various industries provided comments on the potential impact of sweeping new actions in this area. Several groups representing financial institutions and others in the financial services industry questioned whether incomplete credit portfolios would lead to detrimental outcomes for consumers, while others also pointed to the benefits of modeling flexibility. Other participants also discussed the financial burdens associated with radical changes. Additionally, some benefits of using alternative data continue to be part of this discussion, as well as how best to help credit unseen consumers.
The work of the FHFA, combined with other CFPB and DOE activities, as well as the White House directive on medical debt, which could lead to major changes in the scope of the consumer credit portfolio, is something something that could have a major impact on lending and security and soundness.
As agencies continue to make client-impacting decisions in this area, Brownstein will continue to be at the forefront of this activity.