The classic FICO score has been the gatekeeper to U.S. homeownership for decades, but the Federal Housing Finance Agency (FHFA) has been brewing up a new approach since 2018. Where the classic model factors in credit card and loan payment histories, the new kids on the block—FICO Score 10 T and VantageScore 4.0—take into account rent payments, utility bills, telecom bills and information sources like public records.

Credit scoring modernization can be traced back to the Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155), which was introduced six years ago. The Credit Score Competition Act (section 310 of the act) required FHFA to develop a way to evaluate new credit scoring models for use by Freddie Mac and Fannie Mae.

Introducing two new players

Two new credit scoring models, FICO Score 10 T and VantageScore 4.0, were developed in 2022. The 10 T uses a new set of predictive characteristics generated from both traditional and trended credit bureau data, and VantageScore 4.0 examines consumer credit behavior over a period of time, instead of via a simple snapshot.

The FHFA has approved the use of the new FICO 10 T and VantageScore 4.0 models by Fannie Mae and Freddie Mac, but there are some valid concerns over the lack of transparency and data that went into developing these models. 

It was ultimately decided that both models would be used for all mortgage loans sold to the two government‑sponsored enterprises (GSEs).  

The transition from a tri-merge to a bi-merge system for credit reporting is another area of concern. For each loan, the lender can select two of three agencies to use, or they can still use all three. This could potentially place a community bank in a fair lending situation. 

For example, if a bank selects two credit reporting agencies and omits a third, could that result in someone saying that the agency that was left out would have produced a higher credit score? This is just one example of how the bi-merge muddies the waters in terms of what banks are willing and able to do in terms of fair lending and credit report selection.

At ICBA, we’re working with the other stakeholders, some of which represent larger lenders with the resources necessary to verify these [new credit] models.

A new investment

Shifting to new credit-scoring models may also be costly from a systems standpoint. It’s clear that smaller community banks won’t be able to independently verify these new credit score models. They can’t confirm that they will in fact show that a borrower is creditworthy compared with the previous classic FICO. 

At ICBA, we’re working with the other industry stakeholders, some of which represent larger lenders with the resources necessary to verify these models. If those larger lenders confirm the models, then that will help the industry as a whole.

We’re also working with those stakeholders to ensure that the new models are reliable and that the transition process does not lead to fair lending issues. We want to confirm that these new models are what they say they are, so we’ve been providing feedback on some of the challenges we anticipate, with one key concern being the lack of transparency over the data that’s being used in the new model. 

To date, the FHFA hasn’t released the data or analysis it did to validate the scores, nor have Fannie Mae and Freddie Mac released any of the data and analysis that they did to validate these scores. 

This is a problem that extends beyond the banking industry: Both the mortgage securities and investment industries have to analyze these scores to be able to determine the potential for default at certain score levels. They also need to know that a FICO 10 T 700 credit score and the VantageScore 700 score are roughly the same. So far, none of that data has been made available.

ICBA is also concerned about the overall rationale in transitioning to a bi-merge system as opposed to a tri‑merge, with the key questions being: Who does this benefit, and what will the result be? These and other questions have yet to be clarified by the agencies that put together these new models for the industry.

Lenders should get involved now

The GSEs began releasing VantageScore data in July, while the timeline for FICO 10 T is uncertain at this point. Now is a good time for ICBA members who sell to Fannie Mae and/or Freddie Mac to get engaged in the advocacy process. Talk to your government representatives, submit comment letters, ask for updates and stay informed on the status of the new credit-scoring systems. 

Both Fannie Mae and Freddie Mac have web pages dedicated to the initiatives, and the latter published a detailed “Partner Playbook” on the topic earlier this year. Members can also consult the FHFA credit scores policy page (fhfa.gov/policy/credit-scores) for all the updates and timelines related to the new credit scoring initiative. 

As with all major government initiatives, this one may go through some changes and be pushed out as the details are worked out. There’s a process that bankers will have to go through to learn how to utilize both new scoring methods and the technology to put in place to support this shift, so the sooner you get started, the better.