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Several institutions said their underwriters already exclude paid and unpaid medical debt from their calculation, raising questions about what kind of impact the new model will have on lenders.
August 13 -
VantageScore's new credit scoring model ignores accounts that were referred to collection agencies but then paid off. The company cites cold, hard numbers for its decision to drop a controversial practice.
March 11
The government-sponsored mortgage giants, facing pressure to end their reliance on old credit-scoring models from Fair Isaac Corp., are working with their regulator to study newer alternatives.
Fannie Mae and Freddie Mac confirmed the commitments Friday. They are a victory for VantageScore Solutions, an upstart competitor to FICO that has struggled to gain a foothold in the mortgage-origination business.
VantageScore contends that the question of which credit-scoring models get a seal of approval from Fannie and Freddie is more than a run-of-the-mill business dispute, because it has implications for the availability of U.S. mortgage credit.
Switching to newer models would allow more prospective borrowers to be scored and provide better accuracy about the likelihood of default, VantageScore argues. At a time when many believe that mortgages have become too hard to obtain, those arguments have won allies on Capitol Hill, in fair-housing circles and in the lending industry.
"Lenders will say to us that they're being forced to use old models," said Barrett Burns, VantageScore's president and chief executive officer. "They want the most accurate model they can get so they can reduce the probability of default."
VantageScore has been pushing hard to get the imprimatur of Fannie and Freddie, partly because of the weight the two companies carry throughout the entire mortgage business.
Because loans approved by Fannie and Freddie count, at least for now, as so-called qualified mortgages, a category of safer loans that comprise a large share of the total market, the two firms' underwriting guidelines serve as industry-wide standards, even beyond the loans they buy from mortgage originators.
VantageScore's Burns welcomed the commitment by Fannie and Freddie to study the costs and benefits of using VantageScore 3.0, which was rolled out last year, or FICO Score 9, which was introduced in August.
"I think that's quite constructive. And our hope is that they'd incorporate both models," Burns said.
He added that the newer scoring models from FICO and VantageScore are better for lenders because they are more accurate than their predecessors, better for consumers because more mortgage applicants get scores and better for Fannie and Freddie because they'll earn more revenue from higher loan volume. "It's a triple win," Burns said.
Anthony Sprauve, a FICO spokesman, expressed confidence that after Fannie and Freddie complete their evaluation, they will continue to rely on FICO scores.
"The GSEs should be able to freely decide which credit score best meets their needs based on that evaluation," he said in an email. "Adoption of new credit scores requires extensive testing, and we encourage all financial institutions to adopt FICO Score 9 because it is the most predictive credit score in the marketplace."
The promise by Fannie and Freddie along with their regulator, the Federal Housing Finance Agency to examine newer credit-scoring models came with some caveats.
"This study will take some time to complete," Fannie Mae spokesman Andrew Wilson said in an email. "The costs for Fannie Mae, lenders and other market participants of incorporating new credit scores may be substantial."
Freddie Mac spokesman Brad German noted that factors beyond the borrower's credit score, such as the size of the down payment, are also used to analyze risk. "Scores are one factor," he said in an email.
VantageScore, an eight-year-old company that was started by Equifax, Experian and TransUnion, has found a diverse set of partners in its quest to twist the arms of Fannie and Freddie.
In a January letter to FHFA Director Melvin Watt, Republican Reps. Ed Royce and Spencer Bachus and Democratic Reps. Jim Himes and Carolyn Maloney argued that permitting the use of credit scores from more than one company would remove an unfair barrier to entry in the mortgage market.
In a comment letter filed with the FHFA and other federal agencies last October, the Mortgage Bankers Association expressed concern about "an implicit brand bias in favor of a single credit-scoring brand to the exclusion of all others."
An MBA spokesman declined to comment on VantageScore's efforts to force a change in the guidelines used by Fannie and Freddie. He confirmed that both VantageScore and FICO are members of the trade group.
Other VantageScore allies include the National Fair Housing Alliance and the National Community Reinvestment Coalition, which advocate for access to mortgage credit for racial minorities, people with disabilities and other protected classes.
Shanna Smith, president of the National Fair Housing Alliance, urged Fannie and Freddie to update their credit-scoring models, saying that a failure to do so will result in lending that disadvantages protected groups. "This is something that they must do sooner rather than later," she said.
