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The FHFA released a final rule that governs a new process by which the GSEs must review credit score models (e.g. FICO). The final rule aligns with many of the recommendations NAR raised in its letter to the FHFA on the topic.
Currently, the GSEs rely on a credit score that is nearly two decades old, which ignores innovations in modeling and a wealth of non-traditional information about potential homebuyers including rent, telecom, and utilities payments. Under Senate bill 2155, the GSEs were required to develop a framework for evaluating new credit models.
The preliminary proposal included a prohibition on any credit model company owned by a credit reporting agency (CRA). The concern is that such a credit score company would have an unfair advantage as the CRA would funnel better data or pricing to it versus its competitors. The result could be reduced competition and an adverse impact for consumers. However, VantageScore's models already compete with FICO in other markets for lending (e.g. auto loans, credit cards, etc.) with no limits on competition. The proposed prohibition would exclude VantageScore, a current competitor to FICO, from having its models reviewed by the GSEs, a prohibition that might limit competition. The final rule did not include this prohibition, but the FHFA retains the ability to review potential impacts of new models on market dynamics.
Under the final rule, it will take nearly two years for the GSEs and FHFA to review a new score. It will take an additional year or more to implement a new credit score that is accepted. It is important to note that while the new process allows for new credit scores to be reviewed by Fannie Mae and Freddie Mac, it does not guarantee that a new score will be accepted by the GSEs or FHFA.
This change opens the door for the adoption of new scores including alternative credit models, which NAR has advocated for more than a decade. Alternative credit scores have the potential to allow millions of borrowers who are currently unscored to get a credit score.
For more information see the official release.