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Today the Federal Housing Finance Agency (FHFA) announced that it is shelving its search of a new credit score model, a decision that was expected to be announced in 2018, to focus its attention on implementing the Economic Growth, Regulatory Relief and Consumer Protection Act enacted earlier this year. The Act requires the agency to set definitive rules for Enterprises to follow when validating current credit score models.
Last December, the FHFA put forth a Request for Input (RFI) to stakeholders, as well as consumer advocates, for suggested changes to their current credit score models, including Classic FICO, FICO 9 and VantageScore 3.0. FICO is the model currently used by government-sponsored entities (GSEs) Freddie Mac and Fannie Mae.
According to the agency’s press release, the purpose of this search was to assess the impact of new models on “access to credit, safety and soundness, operations in the mortgage finance industry, and competition in the credit score market.” The FHFA was set to make a final decision on the new credit score models by 2018, but this deadline has now been extended until November 2020, Housing Wire reports.
In the FHFA’s press release, they express that this new shift in direction is still in alignment with the goals of their Conservatorship Scorecard Initiative. “After careful evaluation, we have determined that proceeding with efforts to reach a decision based on our Conservatorship Scorecard Initiative process and timetable would be duplicative of, and in some respects inconsistent with, the work we are mandated to do under Section 310 of the Act,” said FHFA Director Melvin L. Watt in the announcement.
The FHFA Director continued by stating the agency would put their “full efforts” into following the mandated steps of the new Act. “These steps include developing a proposed rule, receiving and evaluating public comment on the proposed rule and issuing a Final Rule to govern the verification of credit score models,” he states. “Thereafter, we will follow through on the steps required to implement the new Rule.”
This decision to delay the utilizing of new credit score models means that FICO will still be the dominant model in the mortgage finance industry as it is used by the GSEs. The model has faced a history of criticism for being outdated and stringent by not considering other factors that could be indicators of good credit, while newer credit models do. At the same time, some are of the opinion that verifying a variety of credit score models will make it harder to assess a borrower’s true credit score.
As the FHFA formulates a standardization of credit score models, this work will likely touch upon issues regarding what makes for trustworthy and fair credit score models. Until then, borrowers and the mortgage finance industry alike will have to await possible changes in the system.
Read the full press release here.