Fannie, Freddie to Consider Alternatives to FICO Scores--5th Update
By Andrew Ackerman
WASHINGTON -- One firm's dominance over the credit scores used
to vet many U.S. mortgages is getting a shake-up.
Fannie Mae and Freddie Mac, two mortgage-finance firms that back
nearly half of U.S. mortgages, will have to consider credit-score
alternatives to Fair Isaac Corp.'s FICO score when determining a
mortgage applicant's creditworthiness, under a new rule issued on
Tuesday by the mortgage-finance giants' federal overseer.
The move by the Federal Housing Finance Agency is seen as a win
for VantageScore, a credit-score system by VantageScore Solutions
LLC, which is owned by the three large credit-reporting firms:
Equifax Inc., TransUnion and Experian PLC.
"One of my priorities is to ensure that the American people have
a safe and sound path to sustainable homeownership, which requires
tools to accurately measure risk," FHFA Director Mark Calabria said
in a written statement. The new rule "is an important step toward
achieving that goal, " he added.
Regulatory rollback legislation signed into law last year
required the FHFA to set new standards for Fannie Mae and Freddie
Mac to approve credit-score models.
Fair Isaac said it welcomed the FHFA rule. "The FICO Score has
been the industry standard for credit scores for decades because it
is trusted by lenders to be independent, predictive and reliable,
and we are confident that it will remain the superior choice by any
measure established by [Fannie and Freddie]," said Joanne Gaskin,
the company's vice president of scores. Still, the company's shares
closed 5.8% lower.
Many nonbank lenders -- who approve mortgages to individuals and
initiate the bulk of mortgage dollars issued in the U.S. -- have
asked for the ability to use a credit score provided by
VantageScore. These lenders say the alternative score would open
the mortgage market to a greater number of people and lead to more
mortgage approvals, helping to boost home sales and the
Some lenders view FICO scores as an impediment, saying they tend
to be more conservative than alternatives.
Tuesday's final rule is a boon to VantageScore because it
eliminates language from a December proposal that would have
prohibited any credit-score models developed by a company related
to a credit-reporting firm. The FHFA eliminated that restriction
amid pushback from the credit-reporting industry and congressional
"Competition is critical for markets to operate efficiently and
we are confident this decision will benefit consumers, lenders and
the economy at-large," said Barrett Burns, president and chief
executive of VantageScore Solutions, in a written statement.
Credit scores help determine who gets a mortgage and on what
terms. They played a role in the last housing boom and bust as
lenders lowered credit-score requirements, extending hundreds of
billions of dollars of mortgages to subprime borrowers -- creating
a crushing number of defaults.
After the financial crisis, lenders tightened requirements for
potential home buyers. They required higher credit scores that
reduced the number of people who qualified for a mortgage.
That led some lenders to seek new kinds of scores that could be
used to expand the lending pool.
Since Fannie and Freddie buy so many mortgages originated by
others, their requirements have huge sway over the mortgage
VantageScore has long said its score could help approve more
mortgage applicants, in part because it can assign a score to
consumers who haven't used credit in more than six months. FICO
said that VantageScore's approach, which seeks to give credit
scores to people with stale or thin credit files, would lead to
less predictive scores and riskier loans.
The measure goes into effect 60 days after its publication in
the Federal Register.
AnnaMaria Andriotis contributed to this article.
Write to Andrew Ackerman at firstname.lastname@example.org
(END) Dow Jones Newswires
August 13, 2019 22:47 ET (02:47 GMT)
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