Credit Score Competition Would Help Consumers and Reduce Risk

December 10, 2015 by Tony Hadley

By all accounts, the national housing market in the US stabilized with a recent report showing year-over-year growth at 6.8 percent for October 2015. However, while interest rates remain near all-time lows, it’s estimated that millions of Americans are unable to take advantage of this opportunity because they are unscoreable using the current credit score model mandated by Fannie Mae and Freddie Mac (“the GSEs”).

Under their current guidelines, the GSEs require mortgage lenders to use an older version of a consumer’s FICO credit score when assessing their credit risk. This model is based on data from 1995 to 2000 and unnecessarily excludes millions of qualified borrowers. For instance, VantageScore 3.0 allows for the scoring of 30–35 million more people that are currently un-scoreable under the legacy credit score model.

For example, VantageScore expands the depth and breadth of data collected to allow for more creditworthy consumers while balancing risk.  It would allow for more consumers to be scored without lowering credit standards.  With the demonstrated ability of non-legacy models to score more consumers, more consumers would also be eligible for the Home Affordable Modification Program (HAMP) program being conducted by the GSEs.

In addition to limiting innovation that could help boost consumer access to credit, the continued reliance on a single credit score model by the GSEs presents substantial risks to industry, their regulators, consumers and the economy as a whole. Using newer credit score models like VantageScore 3.0 would provide for greater predictability given the expanded data available. It would reduce the both the operational and credit risk of the GSEs.

Congress can help to address this imbalance by passing H.R. 4211, the Credit Score Competition Act of 2015, which was introduced on December 10 by Representatives Ed Royce (R-CA) and Terri Sewell (D-GA). The bill would instruct Fannie Mae and Freddie Mac to update their requirements so that lenders might be able to use other credit scoring models that are empirically derived and both demonstrably and statistically sound.

Experian encourages lawmakers to pass this bill to help encourage the use of innovative and inclusive credit scoring models, while also helping to reduce exposure to potential operational and credit risk.