WASHINGTON — Among the several provisions in the regulatory relief bill, nearing passage in the Senate, is a new measure dealing with credit scores that some observers and stakeholders say is redundant.
A late addition to the legislation sponsored by Banking Committee Chairman Mike Crapo, R-Idaho, would direct the Federal Housing Finance Agency to review credit-scoring alternatives for Fannie Mae and Freddie Mac mortgage purchases. The FHFA currently relies on FICO’s classic scoring model.
Yet the proposal, which reflects an earlier bill introduced by Sens. Tim Scott, R-S.C., and Mark Warner, D-Va., mandates a process the FHFA effectively has already launched. The agency is already seeking feedback on whether to adopt a new FICO score — known as FICO 9 — or a different model known as VantageScore 3.0, or some combination of both.
“The Federal Housing Finance Agency has a process in place to try to broaden the factors it looks at in determining creditworthiness,” said Sen. Sherrod Brown, D-Ohio, the Banking Committee's ranking member, in a recent floor speech. (Brown opposes the overall reg relief bill.)
The Senate bill, which is primarily focused on relieving aspects of the Dodd-Frank regulatory regime, adds a new layer to the intensifying battle between FICO and VantageScore — owned by the three main credit bureaus — to gain an upper hand.
Some note that despite the FHFA’s current review process, the agency still has the leeway to go in a different direction. The bill appears aimed at forcing the agency and the government-sponsored enterprises to follow through on their stated aim to explore alternatives to the current regime. The bill could also speed up the FHFA’s schedule. The term for current FHFA Director Mel Watt expires in January 2019.
Analysts say the legislation, if passed in its current form, is a win for VantageScore, which has more to gain from a deeper focus on credit-scoring alternatives.
In a recent research note, Charles Gabriel of Capital Alpha Partners called the addition of the credit score provision “a surprise victory for the three major credit reporting agencies” that own VantageScore.
"As we read it, under the language now set to become incorporated into" the Senate bill, "the GSEs would be compelled to begin soliciting applications from developers of credit scoring models within 90 days of an effective date falling 180 days after bill enactment, or likely near year-end 2018," Gabriel wrote.
"FHFA could seek extensions, but they would be circumscribed," he wrote. "Meanwhile, we believe the GSEs and FHFA would maintain at least some purview in how far they might venture toward alternative models, although even the agency's and the Enterprises' cautious leadership/managements might feel compelled to respond to Congress's seemingly unmistakable intent to shake things up."
But the provision in the Senate bill has elicited strong pushback from some lawmakers as well as FICO, arguing that the FHFA is already going through its own process of reviewing alternative credit scoring models and the bill could actually delay that process.
Brown also noted that Equifax — which is still drawing congressional ire over its recent data breach — is one of VantageScore's owners.
“This amendment, for reasons I cannot fathom, includes provisions designed to help Equifax,” he said.
But supporters of the proposal also argue that FICO enjoys a monopoly and alternative credit scoring models could expand access to mortgage credit.
“This boils down to whether you believe in a monopoly or opening up a market to competition. History has shown that Americans favor competition and only monopolists favor monopolies,” said Barrett Burns, president and CEO of Vantage Solutions.
At a hearing last August, Scott, one of the provision’s chief Senate sponsors, said more updated credit scoring could open the credit box to more consumers.
“I'm focused on encouraging sustainable homeownership over a simple homebuyership. One way to do so is ... updating the accepted credit scoring models of the GSEs,” he said. “If a family pays their utility bills or their phone bills on time for a decade, it ought to count towards their ability to have a home.”
But FICO says mandating the process of updating the credit score model through legislation is unnecessary, and warns that halting the FHFA review to replace it with a new process could ultimately delay the arrival of a new credit-scoring framework.
“We have always supported a competitive review of credit scoring by FHFA. Unfortunately, this provision circumvents their thoughtful review process, which is nearing completion, and instead significantly delays any decision to update the scoring model used for conforming mortgages,” Joanne Gaskin, senior director at FICO, said in a statement.
The FHFA issued a request for input on alternative credit scoring models in December with comments due at the end of March. The FHFA’s 2018 “scorecard,” which outlines goals, said the agency hoped to conclude its review by the end of the year — when Watt’s term expires.
But Laurie Goodman, vice president at the Urban Institute’s housing policy center, said the FHFA’s approach to pursuing alternative credit scoring is flawed.
“They asked the wrong question,” Goodman said. “They are not allowing for the use of alternative credit at all” and instead framed the question around using traditional credit bureau data.
However, some consumer groups, which initially supported the thrust of the bill and using alternative data to score more borrowers, have cooled on the measure because the FHFA is already exploring alternative credit models.
“If anything, passage of the bill will complicate and slow down this already much-delayed process,” said Chi Chi Wu, staff attorney at the National Consumer Law Center.
But Christopher Whalen, chairman at Whalen Global Advisors, said whether alternative credit- scoring models are eventually adopted may have nothing to do with Congress.
“It doesn’t matter if you tell FHFA to do something — ultimately it matters what the investors and the banks” and mortgage aggregators decide to use, Whalen said. “The discussion in Washington is all about the front end and nobody has thought about what the consumers of ratings and investors” want.