Newly released documents from a Biden-era Freedom of Information Act filing by the Housing Policy Council are reigniting debate over credit score modernization at Fannie Mae and Freddie Mac, showing internal resistance to VantageScore 4.0 and skepticism about using a single credit report.  

HPC highlights two takeaways from the redacted FOIA responses: that the government-sponsored enterprises disagreed with Federal Housing Finance Agency Director Sandra Thompson's recommendation to add VantageScore 4.0, and a single report was found to be less predictive of creditworthiness than two or three.

Documents the council said it obtained from the FOIA request show Fannie and Freddie suggested that FHFA disapprove four scores being considered for inclusion in modernization efforts: FICO 9.0, FICO 10, FICO Resilience Index and VantageScore 4.0 They suggested approving only FICO 10T, which show FHFA overruled them in its decision to add VantageScore 4.0.

The 2022 documents also show that "the enterprises reported to FHFA that the tri-merge and bi-merge credit reports perform similarly whereas a single in-file report shows a decrease in accuracy." That finding refers to "more detailed information" supporting this on a redacted page.

New calls for more research before further action

The council said in a letter to current FHFA general counsel Clinton Jones that it wants more to be revealed about changes to GSE credit scoring and reporting in part because the financial stakes are high and could impact consumers.

"To confidently move forward with FHFA's credit score initiative, HPC continues to believe that the industry needs confirmation that the asserted benefits will not be outweighed by costs," wrote HPC President Ed DeMarco, who was acting director of the FHFA from 2009 to 2014.

The Mortgage Bankers Association said the FOIA response strengthens its push for further research into the use of a single report as compared to a trimerge, with a call for the GSEs to provide fresh data "quantifying the differences."

The current FHFA had not immediately responded at deadline to an inquiry about the Freedom of Information Act response and the council's request for more details. 

Director Bill Pulte has shown interest in spurring competition between scoring and reporting providers, and supported continuation of efforts to release data that would allow for historical analysis of newer metrics' performance.

VantageScore has pushed back on industry calls for more deliberation in the past, noting that the legislative mandate for the credit modernization at the GSEs dates back several years and a lot of information has been disseminated already.

The financial stakes that play into the debate

The back-and-forth over whether a tri-merge or score modernization are necessary for single-family home mortgages sold to the GSEs has gotten heated at times because there are financial stakes for the companies involved.

Some housing finance groups like MBA see benefits to moving only one report instead of tri-merge, such as possible savings for a cost that's mounted due both to price hikes and higher loan fallout rates. Others such as CHLA show concern about the loss of data integrity and possible costs to change processes to handle non-trimerge options.

Meanwhile, the credit reporting bureaus could lose business if the tri-merge that is standard in the mortgage industry were to become optional. Adding further complication, the alternative credit score provider VantageScore is a joint venture of the three major credit bureaus. 

The GSEs' historic use of FICO classic and the trimerge have put both the score provider and the bureaus in situations where competition is limited, so adding VantageScore as a competitor and allowing alternatives to the tri-merge could weaken both their market positions.

Critics such as Sen. Jim Hawley, R.-Mo., have called FICO's position a monopoly and former CFPB Director Rohit Chopra alleged that has allowed it to engage in "price gouging." Chopra also has been critical of the bureaus' limited competition, calling it an oligopoly.

(FICO CEO Will Lansing told CNBC in an interview last year that VantageScore's competition in other markets and pending addition at the GSEs disproves allegations that it has a monopoly. VantageScore has said it has a firewall involving its relationship with the three bureaus, Transunion, Experian and Equifax. Both FICO and the bureaus have responsibility for price hikes.)

Other constituencies that could be affected include any non-GSE mortgage investors or other stakeholders that may need to have comfort with new credit reporting or scoring measures at Fannie Mae and Freddie Mac to not price more adversely in response to their use.

What score providers had to say

VantageScore competitor FICO, which provides the "classic" credit metric the enterprises have used and the more advanced 10T version they're planning to add alongside 4.0, said in a statement that the past disagreement over its competitor points to a preference for its model.

"The outcome of the evaluation confirms that FICO score 10T won," that score provider wrote in the statement posted on its website, while noting that it supports the council's call "for the underlying analysis from the GSEs and FHFA to be publicly released without redactions."

VantageScore called this a "misrepresentation," adding that "4.0 is 13% more predictive of mortgage defaults than FICO Classic, and 15% more predictive during periods of macroeconomic stress."

The statement from VantageScore also alleged that FICO had ties to the council that influenced the FOIA response release, but FICO said it is "not a member of HPC and has no monetary relationship with the organization." HPC does not list it as a member.

FHFA ruled out lender choice in 2022

While FICO argues that the Freedom of Information Act response indicates it is competitive, it remains against options in the implementation of the legislatively mandated move to more modern scores.

FICO also noted that the Biden-era information from the Freedom of Information Act requests reflect "serious concerns with adverse selection risks from a 'lender choice' framework, and we share those concerns."

The documents show that FHFA concluded in 2022 that "requiring lenders to obtain and deliver both VantageScore 4.0 and FICO 10T credit scores will prevent adverse selection by the industry, because lenders will not be able to choose."

The escalating dispute over a single report

The FOIA response added to what's been a growing battle over the viability of a single credit pull, something Bob Broeksmit, president and CEO of the mortgage bankers group, has been pressing for use of for higher scores, but other groups have opposed.

"We can have safe and sustainable mortgage lending based on a single credit report," Broeksmit asserted in a recent blog, noting that financing is done in other sectors of the market on this basis.

Other groups, such as the Community Home Lenders of America and the Consumer Data Industry Association that represents the three main credit report bureaus have asserted concerns about costs and sufficiently accurate data, respectively.

"A reactive shift to single-bureau reports will introduce uncertainty into a complex and volatile system that feeds into the secondary market," the CDIA said in a statement. "Variances across single consumer credit reports will dramatically impact risk and pricing."

Several studies have examined tri-merge alternatives with mixed conclusions related to whether there's a significant difference when fewer reports get used or not. 

The Biden-era FHFA had considered allowing a bi-merge in part due to Standard & Poor's report showing there wasn't a "marked difference" compared to a trimerge. But a recent CDIA report calls the differences involved enough to change loan pricing by thousands of dollars.

"We share CDIA's view that 'accurate data protects everyone,' but we reject the view that it takes buying reports from all three bureaus to get sufficient data to underwrite and price a mortgage," Broeksmit said in the MBA's blog.