The credit and lending communities and federal regulators should reassess the entire credit structure and look for ways to increase the availability of credit to qualified borrowers who are good credit risks. The inadvertent response to the "risk layering" inherent in some mortgage products (e.g. no doc, balloon, negative amortization, or "teaser rate" mortgages) during the financial crisis has been "safety layering" where so many safeguards are being imposed that there is little risk to making new loans.
Credit Scores and the Impact of Foreclosures and Other Credit Problems
Many REALTORS® have questions about FICO scores and the impact of various adverse credit events on the score. A FICO score is a credit score computed using proprietary formulas of the FICO Corporation (formerly called Fair Isaac), but there is not just one FICO score. Read the FAQs below to learn more. Furthermore, there are other credit scoring companies such as VantageScore with its own scores.
Fannie Mae and Freddie Mac (GSEs) currently only use an old version of FICO and do not use credit scores from competitors like VantageScore. NAR successfully lobbied the FHFA to revisit this policy and in 2020 the FHFA released a new framework for the GSEs to review new credit scores for their viability as an underwriting tool and to provide a public review process, with public comment, and a finite timeline for adoption or rejection. The GSEs have only reviewed the older FICO score they currently use, but are expected to review and add additional scores in the future. These alternative scores vary in attributes but have advantage such as using alternative credit data such as utility and telecom payments or rent, or the score may reduce the value of medical debt payments.
NAR has also prepared a chart showing the impact of various adverse credit events on the ability of consumers to purchase another home with a FHA, Fannie Mae, or Freddie Mac mortgage.
Current Legislation/Regulation (bill number or regulation)
H.R.4112 – “Clarity in Credit Score Formation Act of 2021”
What is the fundamental issue?
The housing and mortgage markets have implemented a number of corrections in response to abusive lending, poor underwriting, and a serious recession like the ability to repay rule and capital standards. The result has been much stronger and responsible underwriting rules for the market, but access to mortgage credit remains limited for some segments of the market relative to historic norms.
I am a real estate professional. What does this mean for my business?
Certain consumer segments of local housing markets currently suffer from historically tight underwriting criteria and unnecessary lender overlays. In some cases, unless buyers have very good credit, policies adopted by the lending and credit reporting industries can make it very difficult for them to be approved for a mortgage. Fannie Mae, Freddie Mac and federal regulators (e.g. credit scoring, downpayment requirements, rules impacting mortgage liquidity) also affect mortgage capital availability as well as the homebuyers' ability to qualify for a mortgage, which have been tightened since 2018.
NAR supports the general principle that all mortgage originators should act in “good faith and with fair dealings” in a transaction and treat all parties honestly. NAR’s Code of Ethics already imposes a similar requirement on REALTORS®, who are required to treat everyone in the transaction honestly. Read NAR's Responsible Lending Policy.
The credit and lending communities and federal regulators should reassess the entire credit structure and look for ways to increase the availability of credit to qualified borrowers who are good credit risks. The inadvertent response to the "risk layering" inherent in some mortgage products (e.g. no doc, balloon, negative amortization, or "teaser rate" mortgages) has been "safety layering" in certain consumer segments where so many safeguards are being imposed that there is little risk to making new loans.
The current book of business at the GSEs and FHA is strong by historical standards. NAR believes that overlays on certain loans are the result of excessively tight underwriting, not sound business practices. The GSEs and FHA have a public mission to provide mortgage liquidity to qualified homebuyers, including low- and moderate-income families and first-time homebuyers. This mission is being impaired by limits on the availability of credit by them and the originator community. NAR believes a reassessment of these policies will not only help well-qualified potential borrowers, but also the entire housing market.
Furthermore, NAR believes that homeownership is an integral part of the American Dream that shouldn’t be out of reach for low-income, rural and minority borrowers who lack access to traditional forms of credit. Unfortunately, many responsible Americans with "thin" credit files have been kept out of the housing market. Thus, NAR supports alternative credit scoring models aimed to responsibly expand mortgage credit for millions of hardworking families.
Additionally, given the increased dependence on credit reports by creditors, employers, insurers and law enforcement, NAR believes Americans should not be penalized by mistakes in their credit reports. Unfortunately, inaccurate credit reports have denied access to mortgage credit or have raised the cost of credit for many prospective borrowers. NAR believes that expanded access to free consumer reports and credit scores will help ensure their credit information is accurate. Moreover, NAR believes that individuals, families and students who have been victimized by unfair, deceptive or abusive acts or practices should not penalized by the malicious acts of others.
NAR has distributed its Credit Policy and met with industry groups and regulators to emphasize the importance of reasonable underwriting policies. In the current Congress, NAR supports H.R.4112 – the “Clarity in Credit Score Formation Act of 2021” introduced by Representative Lynch (D-MA). H.R. 4112 would amend the Fair Credit Reporting Act to provide the Consumer Financial Protection Bureau (CFPB) with clear oversight credit scoring models.
In previous Congresses, NAR supported the following credit scoring and credit reporting bills:
H.R. 3755, the "Comprehensive Consumer Credit Reporting Reform Act of 2017" (Waters, D-CA). The legislation enhanced protections for consumers from fraud and identity theft related to the breach and addresses major flaws with the existing consumer credit reporting system by making changes that would enhance consumers’ rights, create more transparency over the consumer reporting and credit scoring process. It would also increase the accountability of credit reporting agencies, furnishers, and companies that develop credit scoring models. While Chairwoman Waters has yet to reintroduce the "Comprehensive Consumer Credit Reporting Reform Act" into this Congressional session, her committee has held hearings featuring the legislation.
S. 1828, the “Credit Access and Inclusion Act” (Scott, R-SC). S. 1828 would help individuals achieve the American Dream by amending the Federal Fair Credit Reporting Act to allow providers like gas, electric and telecommunication companies to report consumers’ payment histories to credit reporting agencies.
H.R. 123, the “FHA Alternative Credit Pilot Program Reauthorization Act” (Green, D-TX). H.R. 123 would help many households achieve the American Dream. Specifically, it amends the National Housing Act to extend from 5 years to 14 years the pilot program to establish an automated process for providing alternative credit rating information for prospective borrowers who have insufficient credit histories.
Conventional Financing and Policy Committee