Is FICO an Outdated Credit Scoring System?
By Elizabeth Stewart @ Real Estate Daily
February 7, 2018

Some non-bank lenders are fighting for a second credit score firm – VantageScore Solutions – to be accepted by government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac. Current FHFA regulations state that lenders who sell mortgages to GSEs must gauge borrowers using FICO scores.

Key Takeaways

  • The FHFA requires lenders that sell loans to GSEs to gauge borrowers using FICO scores
  • Non-bank lenders argue that adding an alternative credit scoring option would reach more non-traditional borrowers
  • VantageScore Solutions LLC claims they could assign credit scores to about 30 million more consumers than FICO
  • Credit scoring firms Experian, Equifax, and TransUnion jointly launched VantageScore in 2006

Brief

Non-bank lenders have been making a commanding rise in the mortgage industry, accounting for more than half of all mortgage dollars issued in the U.S. in recent quarters. Some of these non-bank lenders are now fighting for GSEs Fannie Mae and Freddie Mac to accept credit scores from a new firm, VantageScore LLC, in addition to FICO scores.

As of now, the Federal Housing Finance Agency (FHFA) requires lenders who sell loans to GSE to gauge borrowers using FICO scores. The FICO scoring system, created by Fair Isaac Corp., has been around for decades and almost every lender is set in their ways using it. Changing requirements or adding another, slightly different, scoring system could be more work than its worth.

Despite a long road ahead, many non-bank lenders are still pushing for the FHFA to allow lenders to use a second credit scoring firm, VantageScore Solutions, to gauge borrowers for Fannie and Freddie loans.

Equifax, Experian, and TransUnion believe it VantageScore would open the mortgage market to significantly more approvals and provide a boost to home sales and the economy. The company said it could assign credit scores to 30 million more consumers, with about 7.6 million potentially eligible for a GSE mortgage.

VantageScore said they would assign credit scores to consumers that have had a credit card or loan for as little as one month. FICO requires six months. VantageScore also claims to create credit scores for consumers that have not had their credit report information updated in more than six months.

Many Banks are pushing back against the alternative scoring system. Even the banks that have begun experimenting with VantageScore for small pools of applicants are not convinced of the new system’s utility and worth. “We’ve got so much experience using the system we’re using now,” said CEO of Beneficial Bancorp Inc. Gerard Cuddy.

The banks’ trade group – American Bankers Association – also warned that the new system could unnecessarily loosen underwriting standards. It could also open up mortgage lenders to legal liabilities, says Joe Pigg, senior vice president of mortgage finance at ABA. Banks could face discrimination issues if they only use one system, and cannot service a borrower because of that.

Almost the entire mortgage industry agrees that credit-score requirements need an update, but the FHFA is approaching the idea of an alternative credit scoring system with caution. “The notion that there would be substantially more people credit scored and that would increase access if we had competition is probably exaggerated,” said FHFA Director Mel Watt.

Even some non-bank lenders agree with the sentiment, adding that FICO is still a working system. “I don’t think people are getting boxed out of homeownership,” said Stanley Middleman, CEO of non-bank lender Freedom Mortgage Corp. “And I don’t feel like we’re guilty of something by asking people to have a credit history.”