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The Federal Housing Finance Agency has proposed new rules to vet and approve credit scoring models that Fannie Mae and Freddie Mac use to determine whether to purchase a mortgage.
The proposed changes are part of the FHFA’s directive under the Economic Growth, Regulatory Relief and Consumer Protection Act passed by Congress in May 2018, and come as questions arise as to whether Fannie Mae and Freddie Mac should be using newer credit scoring models than the current FICO® models they rely on.
Under the FHFA’s proposed rule, there would be a new four-phase process during which Fannie Mae and Freddie Mac, also known as the Enterprises, would examine and approve any credit scoring models if the Enterprises chose to use credit scores as a factor in determining whether to purchase the mortgage loan.
The new four-step process would involve:
- Seeking applications from developers of credit scoring models
- Reviewing any submitted applications
- Assessing the credit scoring models
- Considering how the scores would impact the Enterprises’ business. (For example, the vetting process would include weighing how the adoption of a particular scoring model might affect fair lending and the mortgage lending industry as a whole.)
If passed, the new vetting process could have sweeping implications for homebuyers and the entire industry.
Want to know more?
- What’s the background?
- Why does this matter?
- How could this impact you?
- What’s next?
What’s the background?
The FHFA is a watchdog agency developed in 2008 to help ensure that Fannie Mae and Freddie Mac — two government-controlled entities that buy mortgages from lenders — operated safely and reliably. Today, the agency primarily focuses on oversight of these companies, ensuring they have sufficient funds to continue buying mortgage loans to provide liquidity to banks and other lending institutions.
Fannie Mae and Freddie Mac adopted credit scoring as part of their mortgage calculations in the mid-1990s. Since then, they’ve relied on scores from Fair Isaac Co., or FICO. However, the FICO® scoring models used by the Enterprises aren’t necessarily the latest scoring models out there, prompting concerns that reliance on outdated models could be putting consumers with lower credit scores, or little credit history, at a disadvantage when applying for mortgages.
Why does this matter?
The FHFA’s proposed rules would change the way Fannie Mae and Freddie Mac accept new credit scoring models that determine whether they will purchase the mortgage loan. This is important to the mortgage lending industry because it could set a new standard for credit scoring calculations, as lenders often look to the Enterprises’ review process to determine their own lending requirements.
Additionally, the FHFA’s proposed changes could affect FICO’s competitors, specifically VantageScore, which counts the three major credit bureaus — Equifax, Experian and TransUnion — as its founders.
How could this impact you?
If the FHFA’s proposed process for adopting credit scoring models is approved, would-be homebuyers might see changes when they seek a mortgage, but probably not in the short-term. This is because because many lenders currently use and favor the continued use of FICO® scoring models.
If approved, for the next year or two, the current standards for mortgage lending are likely to remain in place until updated or new scoring models are approved or until the FHFA approves any new scoring models. Meanwhile, some would-be homebuyers are likely to continue facing high rent costs because of concerns they can’t afford a mortgage.
The publication of FHFA’s proposal in the Federal Register kicks off a 90-day period for public comment before any final rule can be established. This means there’s still time for the agency to take into consideration feedback from consumers and mortgage lenders.
After the 90-day public comment period, the FHFA can move forward on its final rule, though it’s unclear how long this will take given that current FHFA administrator Mel Watt’s term expires in January. The White House said it would nominate economist Mark Calabria to the post.