A bill introduced Thursday in the House of Representatives would allow Fannie Mae and Freddie Mac to consider alternative credit-scoring models beyond the FICO credit score the government-sponsored enterprises currently use when determining what loans to purchase.
The bill, which is entitled the “Credit Score Competition Act of 2015,” was introduced Thursday by Rep. Ed Royce, R-CA., and Rep. Terri Sewell, D-AL.
According to a joint release from Royce and Sewell, the bill would enable Fannie and Freddie to consider other credit-scoring models, which would level the playing field for borrowers whose credit doesn’t meet FICO’s standards and make it easier for them to buy a home.
“Fannie Mae and Freddie Mac are the largest mortgage purchasers in the nation, but they rely on credit score models that don’t necessarily take into account something as simple as whether borrowers have paid their rent on time,” Sewell said in a statement.
“Home ownership is an integral part of the American Dream that shouldn’t be out of the reach for low-income, rural, and minority borrowers who lack access to traditional forms of credit,” Sewell continued. “This legislation takes an important step towards addressing this issue and helps make homeownership a reality for more Americans across the country.”
According to Royce and Sewell, allowing Fannie and Freddie to make mortgage purchasing decisions with access to “multiple empirically derived, statistically sound credit scoring models” alleviates some of the risk in their portfolios and lowers the chance of systemic risk to the housing market.
“Fannie and Freddie’s 90% share of the secondary mortgage market and reliance on one credit scoring model has created a near monopoly in this field,” Royce and Sewell’s statement reads. “Opening the GSEs up to other credit scoring models will foster competition and innovation in the credit scoring industry.”
According to Royce and Sewell, potential homebuyers without a FICO score or with a FICO score below 620 are ineligible for a mortgage that can be sold to Fannie or Freddie and are often “frozen out of the housing market” by the current system.
“The GSEs' use of a single credit score is an unfair practice that stifles competition and innovation in credit scoring,” Royce said. “Breaking up the credit score monopoly at Fannie and Freddie will also assist them in managing their credit risk and decreases the potential for another taxpayer bailout.”
In Royce and Sewell’s view, lower-to-middle income Americans who are qualified to buy a home but are unable to do so because of their FICO score or lack thereof will “specifically benefit from the GSEs using other credit scoring models.”
Royce and Sewell’s bill becomes the latest in a growing movement to push beyond FICO.
Last year, Freddie Mac’s CEO Donald Layton told HousingWire that Freddie was already considering “one or two alternatives to FICO.”
Proponents for FICO alternatives note that GSEs currently use the FICO 4 model, which has been in use by Fannie and Freddie since before the housing crisis.
FICO itself released FICO 9 last year, which is supposedly more accurate and beneficial for first-time homebuyers, but the GSEs have not adopted it yet.
The Department of Housing and Urban Development and the Federal Housing Administration have already stated that alternatives to FICO need to be considered.
In a speech earlier this year, HUD Secretary Julian Castro said that HUD is open to alternatives.
“I know that new credit scoring models are being developed so that non-traditional factors can be considered when determining creditworthiness,” Castro said in April, adding that the FHA is exploring the use of new credit scoring models.
“We’ll look at every option that brings housing opportunities within reach of more Americans,” Castro said.
One of the alternatives to FICO is VantageScore, which enthusiastically welcomed Royce and Sewell’s bill, which would in VantageScore’s opinion “end the GSE lockout and FICO monopoly” on credit scoring.
“Outdated credit scoring models required by Fannie Mae and Freddie Mac limit opportunities for millions of creditworthy borrowers who, through no fault of their own, are unfairly locked out of the automated underwriting programs used by most mortgage lenders,” VantageScore Solutions President and CEO Barrett Burns said in a statement.
“Locking out competitive models and creating what is essentially a government sanctioned monopoly also undermines innovation among model developers, which must be preserved and encouraged in order for the market to operate efficiently for borrowers and lenders,” Burns continued.
“We strongly support a bill that promotes access to sustainable mortgage credit, and healthy choice and competition among credit scoring models,” Burns said. “We encourage industry leaders to voice their support of this bipartisan measure.”
