As the topic of credit reporting and credit scoring remains front and center at several federal agencies, a major Federal Housing Finance Agency (FHFA) decision, stemming from a 2019 final rule regarding credit score modeling, is looming. The FHFA's new scoring models could require that Fannie Mae and Freddie Mac, the government-sponsored enterprises (the GSEs), who have used the classic FICO credit score since 2003, consider several new to credit modeling and alternative data. Depending on what the FHFA decides, this could have enormous regulatory consequences for lenders, mortgage insurers, mortgage originators, Mortgage Backed Securities, Credit Risk Transfer investors, and technology vendors, as well as consumers.
In early March, FHFA held a Credit Score Model Listening Session on this topic. The various scoring model ideas included as part of the discussion were prompted by a congressional directive in Section 310 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 and FHFA work on this issue for several years. During debate on this legislation, it was discussed whether there was proper consideration of rent, utility and cell phone payments and whether there was a need for additional data. Notably, FICO has several new credit scoring models that would include additional information, but has also pointed out that their original model also accounts for this information. The credit reporting agencies also developed VantageScore a credit-scoring model.
The FHFA announced a four-phase process for considering a new model and four options:
(1) Single Score: The GSEs require delivery of a single score either FICO 9 or VantageScore 3.0, if available, on every loan;
(2) Require Both: The GSEs require delivery of both scores, if available, on every loan;
(3) Lender Choice: The GSEs would allow lenders to deliver loans with either score, when available, with certain constraints such as using one score or the other for a defined period of time; and
(4) Waterfall: The GSEs would allow delivery of multiple scores through a waterfall approach that would establish a primary credit score and secondary credit score.
After the listening session, it is expected that the FHFA may make some decisions about next steps by the end of the year, and then begin a process that may take approximately two years or more to make the changes. This has been an ongoing project for several years.
Other Corresponding Agency and Administrative Activity
Over the past few years, consumer groups, during discussions regarding the new FHFA scoring model, have been arguing that medical debt should either have less weight or be totally eliminated from consideration. Notably, certain models, including FICO 9 and VantageScore 3.0, lessen the score of medical debt and remove paid debt. As we recently reported, Equifax, Experian and TransUnion announced major policy changes to reporting for medical debt and the Consumer Financial Protection Bureau (CFPB) has been active in this space. In his testimony in the House Financial Services Committee on April 26, CFPB Director Rohit Chopra stated, in regard to medical debt on credit reports, that he is not sure, "whether it's appropriate to include this information at all," prompting questions about whether the agency will take action in this area.
The White House has also argued for unique treatment of medical debt for credit reporting.
Additionally, student loan debt remains a focus of the administration and could also be part of any discussion in future months when rethinking credit modeling and scores. Most recently, on April 19 the U.S. Department of Education (DOE) announced other actions it plans to take related to student loans, hinting that there are more to come.
Impact on Lenders
During the March FHFA listening session, groups representing various industries provided comments about the potential impact of sweeping new actions in this area. Several groups representing financial institutions and other financial services industry participants questioned whether incomplete credit portfolios would lead to harmful outcomes for consumers, while others also highlighted benefits from flexibility in modeling. Other participants also discussed cost burdens associated with sweeping changes. Additionally, some benefits of using alternative data continue to be a part of this discussion, as well as how to best help credit invisible consumers.
The work at FHFA, combined with other activity at the CFPB and DOE, as well as the White House directive on medical debt, which could lead to major changes in the scope of a consumer's credit portfolio, is something that could have a major impact on lending and safety and soundness.
As agencies continue to make decisions impacting clients in this area, Brownstein will continue to be at the forefront of this activity.
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