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Groups push for FICO score alternative

The mortgage lobby last week said that Fannie Mae and Freddie Mac aren’t moving fast enough in adopting alternative credit scoring methods to the “outdated” FICO score.

In a letter last week to the government-sponsored enterprises’ (GSE’s) regulator, the Federal Housing Finance Agency (FHFA), a coalition of 16 groups said the current credit-scoring system is “not adequately serving today’s credit market.” Consumer groups have long said that the old FICO model disqualifies many first-time buyers with thinner profiles, who could be accurately modeled with later versions of the FICO model or new scoring formulas. This also would help boost the low levels of homeownership, particularly among minorities.

FICOFHFA Director Mel Watt said during a speech in New Orleans on Aug. 1 that Fannie and Freddie wouldn’t consider rolling out scoring alternatives until at least mid-2019 when the GSEs complete a new securitization platform and begin issuing a single security. Watt also asserted that over the short term a new credit scoring methodology wouldn’t have much impact on credit availability. The enterprises would consider evaluating new scoring systems through at least the rest of this year. 

Several trade groups, including the Mortgage Bankers Association and National Association of Realtors, along with consumer and civil rights groups, such as the National Urban League and National Community Reinvestment Coalition, signed the letter. The coalition has requested a meeting with Watt, saying the agency’s review of alternative scoring methods has already dragged on for three years.

“We are in a situation where we have the lowest homeownership level in 50 years,” said Scott Olson, executive director of the non-bank trade group, the Community Home Lenders Association, among the mortgage trade groups signing the letter.

“There is a general consensus that mortgage credit still seems to be a bit on the tight side,” Olson told Scotsman Guide News. “You have to do it right, but I think the urgency is that we still see these not-so-positive metrics for homeownership.”

FICO, originally Fair, Isaac and Co., is a private analytics company based in San Jose, California. The FICO scoring model has gained a virtual monopoly in the mortgage industry. The three credit bureaus, Experian, Equifax and TransUnion, all generate FICO scores, in each case using slightly different versions of older FICO formulas. Typically, the middle score of the three is accepted by lenders. A person’s credit score can be a major factor in whether a person qualifies for a loan, and also its price.

Other scoring systems have been developed, such as VantageScore, which was rolled out by the three credit bureaus in a joint venture. Consumer groups have pushed for new scoring systems that consider wider sources of information, such as a person’s rental history or utility payments. 

In January 2015, FHFA included in its annual scorecard a directive for the enterprises to study alternative scoring models with the goal of increasing credit availability. 

In a July analysis, the nonprofit policy think tank the Urban Institute said the FICO model was “outdated” and “based on models established in the late 1990s.” The report said that newer FICO models and recent versions of the VantageScore could yield more accurate readings of a consumer’s credit risk. 


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