Requiring lenders to pull credit reports from all three credit bureaus is a costly, outdated relic that provides “scant tangible benefits,” the head of the Mortgage Bankers Association said Wednesday in calling for Fannie Mae and Freddie Mac’s federal regulator to put an end to the practice.
MBA President Bob Broeksmit said the trade group passed a formal resolution this week calling for the Federal Housing Finance Agency (FHFA) to end tri-merge reporting requirements for lenders who submit loans to Fannie and Freddie.
The agency had been on course to switch to bi-merge reporting this year, as part of longstanding plans to adopt two new credit scoring algorithms — VantageScore 4.0 and FICO Score 10 T — for lenders delivering loans to Fannie and Freddie.
But after abandoning that timeline in January, FHFA Director Bill Pulte announced on July 8 that the agency would stick with tri-merge reporting and let lenders begin using either VantageScore 4.0 or the older FICO Classic score, which has been in use for three decades.
Implementation issues are still being ironed out, and Fannie Mae and Freddie Mac currently accept only loans scored using FICO Classic.
In a video address to MBA members Wednesday, Broeksmit characterized Pulte as an “eager ally” in the MBA’s goal to tackle “spiking” costs of credit reports and credit scores.
“That is the kind of competition we need in the credit scoring space that will lead to innovation in the form of more predictive scoring and lower costs, both for you and your customers,” Broeksmit said of plans to allow lenders doing business with Fannie and Freddie to use VantageScore 4.0.
The MBA “has been in the trenches with FHFA staff and leadership at Fannie and Freddie” working on VantageScore 4.0 implementation issues, he said. “You might imagine a change of this scale doesn’t happen overnight.”
Pulte had said he was “not happy” about price increases levied by the company behind the FICO score algorithm, Fair Isaac, which an industry trade group, Community Home Lenders of America, claims total 700 percent over the past three years.
But once implemented, Pulte’s order will pit the newer VantageScore 4.0 — which was developed by the big three credit bureaus, Equifax, Experian and Trans Union — against Fair Isaac’s older, less inclusive FICO Classic score.
The credit bureaus maintain files on consumers that track their debts and repayment histories, and that information is fed into credit score algorithms like FICO and VantageScore to generate credit scores.
The plan being moved forward by the FHFA under the Biden administration would have retired the FICO Classic score this year, and required lenders to start using both VantageScore 4.0 and Fair Isaac’s newer score, FICO Score 10 T. But instead of pulling credit info from all three credit bureaus, lenders would have been allowed to use information from two credit bureaus to generate the scores.
Both of the new scores are intended to be more inclusive, considering trended credit data and additional data such as rent and utility payments not utilized by the Classic FICO score, Fannie Mae noted in a January update on plans to transition to the new scores.
Pulte’s order pitting VantageScore 4.0 against FICO Classic will put Fair Isaac at a competitive disadvantage, “driving it out of the market” and making “the anti-competitive nature of the credit scoring market even worse,” Chi Chi Wu, director of consumer reporting and data advocacy at the National Consumer Law Center, said in a July 28 op-ed.
Chi Chi Wu
“Not only is it highly unorthodox to be making huge policy decisions via social media, but Pulte’s announcement upended a decade of thoughtful work by the FHFA and the entities that it regulates,” Wu wrote.
Lenders were initially stumped by Pulte’s July 8 decree that they would be allowed to use VantageScore 4.0, and Fannie and Freddie have yet to implement it.
Issues now being resolved behind the scenes include whether the mortgage giants will use different loan-level pricing adjustments (LLPAs — fees charged according to borrower risk) for VantageScore 4.0. It also remains to be seen how investors in mortgage-backed securities (MBS) will treat loans scored using the newer algorithm.
The MBA wants to see Fannie and Freddie accepting VantageScore 4.0 “as soon as possible” and FICO Score 10 T “in the future,” Broeksmit blogged last week — saying Pulte’s “decisive leadership and bold action has accelerated what had previously been a multi-year process.”
But the MBA is taking a stronger public stance opposing the FHFA’s decision to stick with tri-merge reporting.
Bob Broeksmit
“I have said many times, tri-merge is an outdated relic of a time when data was fragmented and inconsistent, leading to significant disparities between the reports that the different credit reporting agencies produced,” Broeksmit said Wednesday. “If anyone were designing a new system from scratch, they would never design a system with that sort of redundancy, that increases costs, offers borrowers and lenders no choices, and provides scant tangible benefits.”
In June, Broeksmit revealed that the MBA has been studying the feasibility of allowing lenders to use a single credit report for Fannie and Freddie, FHA, VA and USDA loans.
“A single file/single score approach would mirror that of most other consumer finance markets, including home equity loans and auto loans – which have seen success with this structure,” Broeksmit said in a June 13 blog post.
The FHFA did not respond to Inman’s request for comment. TransUnion, which had opposed the Biden administration’s plans to move to bi-merge reporting for loans sold to Fannie and Freddie, referred Inman to the Consumer Data Industry Association (CDIA), which represents credit bureaus.
In a July 10 press release, the CDIA applauded Pulte’s announcement that Fannie Mae and Freddie Mac would continue to require that lenders use tri-merge credit reports.
By also allowing the use of additional credit scoring models that incorporate alternative data, lenders would have more information “to help facilitate lending and expand access to credit while assessing risk,” the group said.
“We thank Director Pulte for sending a strong signal to preserve the tri-merge credit reporting system that helps maintain the safety and soundness of the financial system,” CDIA President and CEO Dan Smith said in a statement.
The CDIA provided Inman with a similar statement from Smith on Aug. 7, saying that having data from all three credit bureaus “helps lenders more accurately assess consumers’ likelihood of repaying a mortgage and ensures they get the best mortgage rates available for loans they can afford to repay.”
With the addition of data sets like rent, buy now pay later, telecom, pay TV, home security and utility payment data, “we are seeing a broadening of variances in the data supplied by the three bureaus,” Smith said. “The comprehensive and complete view of a consumer’s creditworthiness that is provided by a tri-merge report offers significant expansion in access to credit. Leaving out even one data set can jeopardize a consumer’s ability to get the best terms possible and could also allow them to get a mortgage they can’t afford to pay back.”
Editor’s note: This story has been updated to include additional comments from Dan Smith, president of the Consumer Data Industry Association.
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