Evaluating an alternative
■ n The FICO score has been industry standard
■ n Federal regulators are considering new
■ n An approach that lowers standards doesn’t
help the industry or borrowers.
■ n Any change will require compatibility testing
as well as pricing and actuarial-model changes.
■ n The evaluation of new models should include
an independent cost-benefit analysis.
Joanne Gaskin is the vice president of scores and analytics
at FICO. She is responsible for the strategic direction of FICO’s
scoring products and business partnerships serving
the needs of the mortgage industry. Gaskin has more than
20 years of experience in banking and financial services. She
led efforts to address some of the most important topics
impacting the mortgage market today: regulatory compliance,
credit-risk management, data security and eMortgages. She
is a graduate of the Mortgage School of Banking, earning
the accredited mortgage professional designation. Reach
her at email@example.com.
For more than 30 years, the FICO credit score has been the standard for evaluating credit risk in consumer credit markets — from credit cards to auto loans. Because of its wide
adoption by lenders, Fannie Mae and Freddie Mac,
the government sponsored enterprises (GSEs) subsequently adopted the FICO score for use in originating
In the decades since, mortgage originators, investors and the housing-finance industry at large have
come to use the FICO score as the independent, reliable indicator of credit risk in the mortgage market.
In recent years, at the direction of the Federal Housing Finance Agency (FHFA), the GSEs tested newer
credit-scoring models to determine their predictive
potential in the housing market.
The FHFA in 2017 then initiated a “request for input”
to engage stakeholders and carefully determine the
operational and competitive considerations necessary for changing or updating the GSEs credit-score
requirements. Before FHFA could complete the decisionmaking process, Congress intervened, requiring
a new rulemaking process as part of the Economic
Growth, Regulatory Relief, and Consumer Protection
Act. This delayed a final decision on the matter, and
FHFA is now developing a new proposed rule.
FHFA is the appropriate entity to regularly test
credit-scoring models because taxpayers ultimately
hold the associated risk, unlike other credit markets
where lenders bear the risk, such as credit cards or auto
loans. FHFA can use the rulemaking process established by Congress to make meaningful improvements
to the current system, including the use of a more
As part of this rulemaking process, any change in
the standard measure of credit risk in the mortgage
market also must include a careful consideration of
the impact to the entire housing-finance ecosystem,
including increased costs to mortgage originators
and private mortgage insurers. FHFA will be soliciting
public comment on this rulemaking, and there is an
opportunity for mortgage originators to lend their
voice to this debate.
The FICO credit score has long been the industry stand-
ard as a reliable predictor of credit risk. And it’s not just
for mortgages. According to research by the Mercator
Advisory Group, in 2016 FICO credit scores were used
in 90 percent of the lending decisions related to auto-
mobile, credit card and mortgage financing. There
are no requirements to use the FICO score in these
markets. Lenders and investors trust the FICO score to
be independent, predictive and reliable.
The only alternative to FICO that has been considered by FHFA is VantageScore, a joint venture of the
three main credit bureaus that claims to be able to
expand access to mortgages. VantageScore lowers
the minimum scoring criteria, which have long been a
source of reliable performance in credit scoring.
VantageScore’s approach includes scoring a borrower seeking a mortgage with as little as one month
of credit behavior or a credit report that hasn’t been
updated in more than 24 months. Should lower standards be accepted, this introduces potentially dangerous unreliability and risk into the mortgage market,
which has no historical performance data to truly reflect
the risk associated with these mortgage originations.
This past December, the FHFA published a proposed
rule — which is still subject to public comment and
final approval — that calls for prohibiting the GSEs
from adopting VantageScore or other credit-scoring
models developed by credit-data providers such as
the major credit bureaus, given the potential conflicts
of interest posed by such an ownership structure. Regardless of the fate of that proposed FHFA rule, there
is a better way to responsibly expand access to credit
for borrowers and provide a bridge to homeownership. By innovatively using data which is not housed
in traditional credit-bureau files, the credit box can
be expanded while maintaining sound underwriting.
To do this requires new data sources that meet industry standards while properly assessing a borrower’s
credit risk and assigning a meaningful and reliable
score to people with thin or stale credit-bureau files.
FICO Score 9, for example, evaluates medical debt
differently from other debts, increasing the score’s
predictiveness and further increasing access to credit.
In addition, the recently announced UltraFICO Score
pilot allows borrowers, for the first time ever, to contribute their checking, savings or money market
account data to potentially enhance their FICO scores.
Expanding access by innovatively using trusted data
will benefit both consumers and industry stakeholders, building on the integrity of the system. This is in
contrast to simply lowering scoring standards, which
could revive the predatory-lending practices that led
to the financial crisis.
Reliable Credit Scoring
Is Vital for Homebuying
Any change to the measure of credit risk should
consider the entire mortgage market, including costs
By Joanne Gaskin
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