The purchase of a home stands as a critical first step towards establishing true generational wealth for many Americans. Congress recognized this importance and ultimately created the GSEs to help expand U.S. homeownership. The Federal Housing Finance Agency (FHFA) has proposed a change that will offer an option to use credit reports from only two of the three credit bureaus, ostensibly in an effort to reduce costs for borrowers and to spur innovation. However, should a lender choose this option, it likely will not achieve either objective.
For more than three decades, the tri-bureau credit ecosystem has served as the industry standard, providing lenders with borrower credit report data from each of the three Nationwide Credit Reporting Agencies (NCRAs). The FHFA has proposed a shift to a bi-merge credit environment, ostensibly in an effort to reduce costs for borrowers and to spur innovation. The reality is that such a shift is likely to achieve neither objective.
While one may question the wisdom of proposing a reduction in the amount of borrowers’ credit reporting data available to lenders at a time when U.S. consumer debt stands at an all-time high of more than $17 trillion, the proposed requirement is likely to create a number of unintended (yet, predictable) negative consequences for both borrowers and lenders.
Borrower impact
According to Equifax internal data, there can be as much as a 20-point difference in a consumer credit score on 15+ of consumers across the three bureaus. This is attributable to the fact that many credit unions, community banks, collections agencies, and other financial services providers only report data to a single bureau, resulting in significant data elements that may be present on only one bureau’s credit report.
Additionally, approximately 28 million adult consumers are unscoreable at any one credit bureau, and of those 28 million, another 12 million are also unscoreable at a second bureau. Further, it has been estimated that between 4.8 million and 7.5 million consumers are only scorable at one credit bureau. Of these consumers, 1.7 million to 2.8 million have near prime or better credit scores, so a bi-merge credit report strategy could lead to these consumers either being denied a loan for which they qualify or alternatively, being offered more expensive financing options
This ultimate outcome runs directly counter to the stated mission of the GSEs, as an incomplete picture of a borrower’s credit profile used for loan decisioning has the potential to create an improper denial of credit to as many as 2.8 million borrowers.
For those borrowers who are not denied access to credit, but who are pushed into more expensive financing options as a result of omitted data, this could lead to Loan Level Pricing Adjustment (LLPA) costs could increase as much as $3,000 for some borrowers.
Lender and investor impact
In addition to borrower impact, the change to a bi-merge ecosystem will also create additional risk and costs for lenders, secondary market investors, and the GSEs.
The emergence of new financial services offerings in the market, such as Buy Now Pay Later (BNPL), along with some fintech consumer lenders that are not uniformly furnishing data to all three NCRAs, are creating significant data blind spots for mortgage lenders. As a result, the use of two—rather than three—credit reports may omit additional important tradeline information about potential borrowers.
To illustrate the scope of the issue, Equifax analyzed fintech unsecured installment loans within its database and found that from January 2021 through January 2023, the total number of fintech unsecured installment loans grew by 3.1 million (48% increase), representing total balance growth of more than $26 billion (44% increase).
Infrequent or inconsistent reporting of trades to all three NCRAs (such as a BNPL or fintech loans), obfuscates complete information for lenders, including additional consumer debt obligations, and in some cases, delinquencies Because the lender has no visibility into that borrower’s full debt obligation, an inaccurate risk assessment is the more likely result in the movement of a borrower into a higher credit score band, along with the creation an unforeseen risk prospectively within the lender’s portfolio.
More (not less) data creates more opportunity for borrowers
The mortgage industry is united in its commitment to helping more Americans responsibly secure mortgage financing. While the FHFA’s efforts to reduce costs for consumers is well intentioned, under proper scrutiny, its bi-merge credit reporting proposal simply misses the mark. In too many cases, any minimal savings that might be passed along to borrowers in the origination process as a result of a lender using two rather than three credit reports is offset by the potential savings that the borrower may miss out on over the life of a loan with better rates and terms. In the complex consumer debt environment that exists today, the emphasis should be on gaining access to more and not less actionable data to help inform loan decisioning.
