BankThink

The new FHFA credit score rules will make buying a home harder

Today’s BankThink authors say new FHFA credit score rules will make homebuying harder
Buying a home is never easy. The FHFA's proposed rule allowing lenders to look at fewer consumer credit reports will make it unnecessarily harder for many Americans, write Kevin B. Kimble and Thaddaus Dawson.
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Buying a home is never easy. It's expensive, confusing and loaded with paperwork under the best circumstances. It's even harder these days when the average price of a home is over $400,000 in the U.S., and higher interest rates are making homes that much more expensive.

That's why it's so curious that federal regulators might write rules to make homebuying even tougher, however unintentionally, for lower- and middle-income families with modest credit.

Currently, banks must look at three different credit reports from the major credit bureaus (Equifax, Experian and TransUnion) when a consumer applies for a conventional mortgage. It's what's known as a "tri-merge" requirement, and it makes sure every homebuyer has three opportunities to prove their creditworthiness and put their best foot forward.

One writer for Rocket Mortgage said it's "the most comprehensive look at their borrowers' credit history," and that's a good thing. But last year, the Federal Housing Finance Agency (FHFA) proposed to move away from the "tri-merge" system and require only two credit reports, not three  — or what's known as a "bi-merge" system.

That change barely got noticed at all until members of the House Financial Services Committee — Democrats and Republicans — started raising concerns at an FHFA oversight hearing in May. Congressman David Scott, Democrat of Georgia, had this to say: "My concern is that by removing one of the reports from a lender's review, FHFA is potentially leaving out predictive and positive credit history … this action could have serious implications for consumers planning to purchase a home."

FHFA no doubt has its reasons. In truth, a bi-merge might be just fine for consumers with perfect credit. But for low- to moderate-income borrowers, it could be a big deal.

Let's face it: Sometimes, bills get overlooked. Imagine a consumer with a recent bill in collections. If that collection shows up on one of their three credit reports — and it happens to be the one their bank pulls for a loan — the consumer only has one more opportunity in a bi-merge system to demonstrate their creditworthiness instead of two.

The opposite scenario plays out for rent. Not all landlords send a history of on-time rental payments to a credit bureau, which means renters don't always get (literal) credit for paying their rent on time.

But what if a consumer lives somewhere that does share those on-time payments with a credit bureau? Under a bi-merge system, homebuyers only get credit for the rental payments if the bank where they're seeking a loan uses the credit report that lists those rental payments. If they pull one of the other two, that homebuyer could be out of luck.

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The same is true if a potential homebuyer has a credit card through a local bank. If that bank only shares data with one of the three credit bureaus — instead of all three, like some bigger banks — the consumer may appear "credit invisible" when they go to get a mortgage at a competing bank if the bi-merge report used for that mortgage doesn't include the "right" credit report.

That's unfair to the consumer and reduces the incentive to use a small or community bank — good institutions that know the people they serve and play an indispensable role in suburban and rural areas.

Finally, there's the question of equity. We all know who gets left out when financial opportunities narrow; consumers from historically disadvantaged communities are more likely to have modest credit.

Those potential homebuyers should have every opportunity to represent themselves wholly and completely when they apply for a loan. That's exactly what the tri-merge represents, and it's exactly why it should stay in place.

Something that's simple and straightforward today becomes a roll of the dice in a bi-merge system. That means fewer choices for borrowers who want to shop around and a higher likelihood of missing out on the loan.

Here's the good news: FHFA's director, Sandra Thompson, is a smart leader with good intentions. The bi-merge idea is a simple oversight from an office working daily to support homebuyers, including those in disadvantaged communities.

Even better news: There's still time to turn it back. That's exactly what FHFA should do.

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Regulation and compliance Consumer banking Consumer lending Credit
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