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FHFA rules out VantageScore as alternative model

The regulator of Fannie Mae and Freddie Mac this week has proposed to ban VantageScore as an alternative credit-score model, citing issues with its ownership structure that might create a conflict of interest.

VantageScore was developed as a joint venture of the three major credit reporting agencies, Equifax, TransUnion and Experian. FICO, which was created by the Fair Isaac Corp. decades ago, is the only scoring model used to evaluate borrowers of Fannie Mae/Freddie Mac-eligible loans.  

creditscoreIn a proposed rule published this week, the Federal Housing Finance Agency (FHFA) laid out a framework for Fannie and Freddie to adopt scoring models other than FICO, but specifically prohibited the government-sponsored enterprises (GSEs) from adopting a model developed by a data provider.

FHFA wrote that VantageScore might immediately gain a competitive advantage because of the huge footprint of the three national credit-reporting agencies. FHFA also noted these agencies own all the data that is used to construct current models, and have the power to set the price. 

“Vertical integration with a credit-score model developer could, in theory or practice, permit a CRA [credit-reporting agency] to sell credit scores constructed from data (including the scoring algorithm) that the CRA owns more cheaply,” the FHFA wrote.

This rule has an uncertain future, however. It is a proposed rule, and so subject to change. The announcement also comes in the waning days of FHFA Director Mel Watt's tenure. A final rule won't be issued until after a 90-day comment period. Watt's term expires in early January. The White House on Tuesday announced that President Donald Trump will nominate conservative economist Mark Calabria to succeed Watt. The new director could change it significantly. 

"We look forward to providing commentary and working with the new incoming director of FHFA," VantageScore Solutions spokesman Jeff Richardson said. "We presume that the next director will share Congress’s desire for a competitive and fair credit scoring market."  

Richardson said should the rule stand as is, the federal government would be "picking winners and losers to the detriment of millions of consumers." 

"Last year, FICO imposed a historic price increase on mortgage borrowers for a scoring model approaching twenty years old," Richardson said. "That is the essence of monopolistic behavior and control." 

Richardson said that the rule effectively bans all potential competitors that would be capable of developing a credit score. Other companies with that capability, such as a CoreLogic or LexisNexis, would run into the same ban. Richardson also said that the rule is not in keeping with the spirit of this year's Dodd-Frank regulatory relief reform law, which required FHFA to develop a framework to certify and adopt alternative credit scores. 

"Simply put, the language is not reflective of the intention and desire that Congress had when it passed the credit score competition provisions of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018," Richardson said. 

FHFA has been studying this question since 2015, and closely investigated the merits of Classic FICO, FICO 9 and VantageScore 3.0. Watt announced in the summer of 2017 that he was the delaying the decision until at least 2019.    

Some mortgage trade groups and housing advocates have pushed for alternatives, saying the classic FICO is out of date and excludes creditworthy borrowers, particularly minorities with thin credit profiles. FICO scores have become a standard way to evaluate a borrower's credit worthiness, but it is not the only measure. FHFA noted in the text of the rule that the GSEs are not required to use credit scores, and the new rule doesn't require their use. Fannie and Freddie have also in recent years rolled out underwriting systems that can evaluate borrowers without credit scores. 

The nonbank trade group, the Community Home Lenders Association (CHLA) was among the groups supporting alternative models.

“While CHLA understands FHFA’s concerns about conflicts of interest, this development is disappointing,” Executive Director Scott Olson said. “We would encourage the GSEs and FHFA to continue to explore options for alternative-scoring models, to ensure that all borrowers that meet reasonable credit standards can obtain a mortgage loan.”

A spokesman for the Mortgage Bankers Association said the trade group was still reviewing FHFA’s proposed rule. 


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