Data issues may thwart expanded underwriting, coalition fears

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A coalition of mortgage industry groups have issued a letter to the Federal Housing Finance Agency that flags hurdles to taking the next step toward updated credit scores that could help them make more loans.

The letter responds to what a representative of the groups said was welcome news that the regulator of two influential mortgage investors planned to get them access to data to analyze the performance of new and old credit metrics sooner than expected.

It centers on a key challenge raised in listening sessions held by the investors' regulator about traditional score data that companies have been directed to use in analyzing the first of two new metrics  that the loan buyers are adopting due to a legislative mandate.

"Getting us data sooner is really positive and welcome but that also raises the question: Is the data that they're likely going to publish going to meet our needs? That was where we had questions,"  said Matt Douglas, who works with the Housing Policy Council.

HPC developed the joint letter with the American Bankers Association, the Independent Community Bankers of America, Mortgage Bankers Association, and U.S. Mortgage Insurers.

Douglas, who is the HPC's director of mortgage policy, said that while the Federal Housing Finance Agency is likely aware of the concerns in the letter due to those listening sessions, the groups involved wanted to present them formally before implementation.

Industry groups have said their comfort with using the new Vantagescore 4.0 metric is dependent on their ability to analyze its track record in conjunction with that of Classic FICO, and they are concerned that restrictions governing data on the latter will impinge on that.

"We understand from FHFA as well as the credit score model providers, that the new credit scores are significantly different from traditional credit scores. We need enough data elements to analyze and model those differences," Douglas said.

"If there are any restrictions or limitations on the types of analysis and modeling that stakeholders can do to understand those differences, then the point of the exercise will indeed be thwarted," he added.

Specifically at issue in mortgage-backed securities and credit-risk transfer information the industry groups said the agency has directed them to extract data on the traditional scores from are restrictions on the latter. CRT data includes sought-after score updates over time.

Both Fannie Mae and Freddie Mac, the government-sponsored enterprises that buy a significant number of mortgages and are implementing updated scores, have restrictions on use of the traditional metric's data for things like "internal development of models."

"The historical credit scores that will be published by Fannie Mae and Freddie Mac will allow market participants to better understand how loans would have been scores at origination by the newly approved credit score models," an FHFA spokesperson said in an email.

"Users will be able to analyze these scores in concert with the enterprises' existing disclosures to support the transition to the new models," the spokesperson added.

FICO also responded to an NMN inquiry with an emailed statement, which indicated it has been working with the agency and the enterprises to finalize terms that will enable access to data sets for its advanced score that can be compared to older metrics.

That effort "will allow stakeholders to appropriately evaluate and compare these data sets with other historical data sets that they require that were not intended for this purpose and are and are governed by terms that pre-date this transition," FICO said.

"We believe this effort is nearly complete," the score provider added.

The letter from the trade groups also asked for credit-report data that could show how the separate addition of a bi-merged credit report might affect underwriting.

(In addition to transitioning to newer Vantagescore and FICO metrics, the investors are also moving from tri-merged credit reports from the "Big Three" bureaus to the option of a bi-merge that only has two, potentially cutting what's been a growing expense.)

The groups said in the letter they need "sufficient detail to evaluate accuracy and fair lending analysis of bi-merge combinations."

Specific asks include data that addresses whether there are differences in information about consumers' obligations between providers that could impact debt-to-income ratios used in mortgage underwriting and its ability to predict loan performance.

Some research by Standard & Poor's found minimal differences in comparing average and median bi- and tri-merge approaches, but a study by one of the credit bureaus (Transunion) has raised questions about whether it might have adverse impacts on consumers.

When asked about the point in the coalition's letter, Equifax said that while it doesn't necessarily have visibility into other national credit reporting agencies' practices, there are differences that could impact DTI calculations in data-field update timing and other areas.

"Smaller creditors (like credit unions, community banks and collection agencies) and emerging financial products, (like fintech loans) may only report to one or two NCRAs," Equifax said in a statement, also noting that each may use "unique alternative data."

The letter also reiterated prior concerns that the Vantagescore data that will be made available will only go back to 2013 and not encompass the full cycle of the Great Recession that's commonly considered a key historical stressed test for mortgage performance.

"We believe industry concerns regarding the extent of the data will be addressed once the information is made public," Tony Hutchinson, senior vice president of industry and government relations at Vantagescore, said in an email.

FHFA has indicated that it's taken time to do a lot of research into data of all the credit metrics in its modernization effort and has expressed confidence that their use will allow lenders to safely qualify more borrowers for financing.

Vantagescore has said the implementation of its 4.0 credit metric at Fannie Mae and Freddie Mac could help lenders add $1 trillion in annual originations. FICO's 10T could increase lending by 5% while cutting default risk by 17%, according to the company.


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