In response to the upcoming third quarter 2024 release of credit score data by the Federal Housing Finance Agency (FHFA) as part of the new credit score models to be used by Fannie Mae and Freddie Mac (the GSEs), a coalition of five industry trade associations have sent a letter requesting additional data elements to consider before moving to the new credit score models that banks and other mortgage industry players need for their analytics.
FHFA implements change
On October 24, 2022, the FHFA announced the validation and approval of two new credit score models, FICO 10T and VantageScore 4.0, for use by the GSEs. Once implemented, lenders will be required to deliver both FICO 10T and VantageScore 4.0 credit scores, when available, with each single-family loan sold to the GSEs. That same day, the FHFA also announced that the GSEs would transition from a tri-merge credit reporting requirement, in which credit reports are required from all three nationwide consumer reporting agencies, to a bi-merge requirement, in which credit reports are required from at least two of these agencies.
In the letter to the FHFA, the coalition—the American Bankers Association (ABA), Housing Policy Council (HPC), Independent Community Bankers of America (ICBA), Mortgage Bankers Association (MBA), and U.S. Mortgage Insurers—expressed concern that VantageScore’s data would be too limited, as it would include information stretching back until only 2013. The use of models calibrated to only the post-financial crisis period would not likely meet prudential regulatory standards or internal requirements for model validation with which they must comply.
Seeking FHFA clarification for risk management
“Our members continue to believe that it is imperative to have credit reporting data ‘through the cycle’ back to 2003 given the sensitivity of mortgage default and prepayment to origination credit scores,” said the groups in the letter. “The correlation between credit scores and mortgage performance has proven to vary significantly over economic cycles. Some industry participants have relayed the related concern that the use of models calibrated to only the post-financial crisis period would not likely meet prudential regulatory standards or internal requirements for model validation with which they must comply.”
On March 23, 2023, the FHFA provided an update on the GSEs’ implementation plans and opportunities for stakeholder engagement. FHFA and the GSEs reiterated their commitment to working with stakeholders to ensure a smooth transition to the new credit scores and the new credit reporting requirements, in a manner that avoids unnecessary costs and complexity.
“We hope that by providing early, proactive, and constructive feedback to FHFA and the GSEs, there will be adequate time to augment the data made available in the planned 3Q 2024 data release, as well as in any subsequent data release,” said the letter. “Providing these additional critical data elements with the initial data release will allow our members to begin their analysis upon publication.”
Coalition seeks deeper interpretation
The coalition listed several clarifications that should be included in the upcoming VantageScore data release for Q3, including:
- The unrestricted use of data contained in the mortgage-backed security (MBS), credit risk transfer, and historical performance disclosures;
- Sufficient data to evaluate the effects of new representative score calculation; and
- Sufficient detail to evaluate the accuracy and fair-lending analysis of bi-merge combinations.
The groups also requested a sample dataset of the usage of FICO 10T and VantageScore 4.0 before the 3Q 2024 full release.
“This would provide the opportunity to identify and address any additional gaps or systemic issues before the historical archives are available,” stated the letter.
The letter closed with a request for delay in the implementation of FICO 10T and VantageScore 4.0 from Q3 as the FHFA considers the clarifications set forth by the coalition.
“While we are certainly committed to working with FHFA and the Enterprises on this project, it is also critical that FHFA understand and consider the broader implications and potential negative impacts on the pricing of mortgage credit if industry stakeholders are unable to obtain the data necessary to complete their analysis,” said the letter.
Click here for more information or to read the letter in its entirety.
