What’s happening with Credit Score updates in Mortgage?

What’s happening with Credit Score updates in Mortgage?

After almost 20 years, credit scores used in mortgage lending are finally getting an update. But there are still a lot of outstanding questions.

FHFA has announced a multi-year effort to update the use of credit scores in GSE mortgage purchases in two ways. First, the number of scores required per borrower will drop, followed by updates to the credit scoring models themselves.

Why is FHFA making these updates?

To increase competition in credit reporting
To expand access to credit without increasing risk

The last year GSEs updated the credit score requirements

2004

Why are industry stakeholders concerned?

Uncertainty over policy details and the resulting rules and requirements
Reliance on technology providers leaves limited time for full testing, roll-out. and adoption
Costs could increase due to requirement for multiple credit reports from multiple scoring models
Bifurcation in the market could occur if FHA, VA, and USDA don’t adopt the changes
Customer education effort will be significant

Transition

Lenders deliver new FICO 10T and Vantage 4.0 scores IN ADDITION to classic FICO. If maintaining the tri-merge approach, there is potential for up to nine scores per borrower – three models per each of the three CRAs

Challenges and concerns:

Significant operational change to deliver multiple scores per borrower
Potential cost increases with so many scores which may trickle down to borrower
Confusion over credit decision rules during the transition
Possibility of different calculation rules for Classic FICO vs. new scores

Updated Credit Score Models

Incorporate new FICO 10T and Vantage 4.0 scores into all mortgage processes – i.e., two distinct scores used in models, decisions, disclosures, etc. New models include more data with predictive value (e.g., trended data, more payment history sources), and exclude less predictive factors (e.g., certain medical debt).

Challenges and concerns:

Major process overhaul with two distinct scores (not comparable, cannot be averaged)
Unknown impacts on credit policy, pricing, rules of usage, disclosure, MBS pooling, etc.
Significant consumer education on what has changed, impact on mortgage acceptance, new adverse action / reason codes, etc.
Standards / consistency of new data - e.g., who governs data like payroll or utilities?
Possible complexity, rework across channels if government agencies don’t follow

“Tri-merge” to “Bi-merge”

Move from current requirement to deliver scores from all three credit reporting agencies (CRAs), to require only two scores – this change is optional. NOT optional, however, is a calculation change from the current median of three scores, to the average of two or three scores per borrower.

Challenges and concerns:

Uncertainty around rules and processes – e.g., how to report scores and reason codes from averages, score delivery rules (especially for early “soft pulls”)
Uncertain timeline for a final decision on calculation rules for multiple borrowers
Inconsistency across CRAs could create adverse borrower impact if only two are used

Current Proposed Plan

Questions? Please contact Martha-Rosalind "MR" Stainton