Recently, the Federal Housing Finance Agency (FHFA) announced the approval of two new credit scoring models, the FICO 10T and the VantageScore 4.0 for use by Fannie Mae and Freddie Mac (the GSEs or Enterprises). Lenders will have a few years to implement use of the new models before being expected to report both scores on loans sold to the GSEs.
Currently, and for the past 20 years, the Enterprises have relied on Classic FICO credit scores. However, in 2014, FHFA, in coordination with the Enterprises and other industry stakeholders, began to develop new credit score requirements that would take into account more factors in order to more accurately reflect the creditworthiness of borrowers with thinner credit files. These efforts have resulted in improved credit scoring models that take into account borrower payment histories, such as payments for rent and utilities.
The FHFA notes, in its fact sheet, that the two new credit scoring models will be more accurate and inclusive than Classic FICO because the new payment history and other factors have gone through extensive testing to ensure accuracy while expanding the datasets relied upon for measuring creditworthiness. Further, the new models are meant to enhance safety and soundness in the housing market by improving accuracy and creating better ways to calculate risks.
In remarks made at the Mortgage Bankers Association Annual Conference, FHFA Director, Sandra Thompson, noted:
“The new models bring the benefits of innovation to the table in two ways:
FICO 10T and VantageScore 4.0 both provide more accurate credit scores than Classic FICO. We believe the market, including investors, will be provided with an improved understanding of risk from not just one but two different credit score models.
FICO 10T and VantageScore 4.0 are more inclusive than Classic FICO. While the Enterprises have already taken steps to expand equitable access to credit, such as enhancements to their underwriting systems, both FICO 10T and VantageScore 4.0 factor in new payment histories for borrowers when available, such as rent, utilities and telecom payments.”
Director Thompson also noted that requiring these scores “will result in more borrowers that can be evaluated by the Enterprises than a single score alone, which will improve their management of credit risk while also responsibly and sustainably expanding access to credit for borrowers with less robust credit histories.”
The FHFA also announced that the GSEs will require two, rather than three, credit reports from consumer reporting agencies. This additional change in credit report requirements is expected to reduce costs to the industry to encourage further innovation.
Director Thompson explained that a multi-year implementation plan will be put in place, and the agency will coordinate with the industry and affected parties in order to ensure a smooth and manageable transition. We will continue to monitor these developments as an implementation plan is put in place.