Bipartisan Senate bill would require Fannie Mae, Freddie Mac to use alternative credit scores

August 3, 2017

A new bill in the Senate would require Freddie Mac FMCC, +0.00% and Fannie Mae FNMA, -0.36% to embrace alternative credit scoring models, which could expand Americans’ ability to buy homes.

The bill, which is co-sponsored by Sens. Tim Scott (R-S.C.) and Mark Warner (D-Va.), would direct the mortgage giants to create procedures that would allow them to consider credit scores other than the traditional FICO FICO, -0.11% score when making the decision to purchase a residential loan. Such a change would allow lenders to use alternative credit scores, such as the VantageScore or FICO Score XD, when determining whether consumers are fit to receive a loan.

The move was celebrated by Vantage Score Solutions, which produces alternative credit scores. “No single company should have a government-sanctioned monopoly, especially when there are millions of consumers that are negatively impacted,” said VantageScore Solution president and CEO Barrett Burns in a statement. “Allowing each lender to choose the credit scoring model best for its business is in the short- and long-term best interest of the housing finance industry and the consumers they serve.”

Legislation of this nature has been circulating in Congress for years. In February, a bipartisan group of congressmen reintroduced the Credit Score Competition Act, which contains the same language as the Senate bill. Also in February, the Consumer Financial Protection Bureau put out a call for feedback on the benefits and risks of alternative credit data. The CFPB has estimated that 26 million people in the U.S. are “credit invisible,” meaning they don’t have a credit history with a consumer reporting agency, while another 19 million consumers don’t have an extensive enough credit history to get a credit score.

Traditional credit scores such as the FICO score only consider whether borrowers have paid debts such as mortgages, credit cards or other loans. Alternative credit scores like VantageScore meanwhile look at a broader range of data to determine creditworthiness such as cellphone bills, utility payments and rental payments. It is estimated that using credit scores beyond FICO would open up access to credit for roughly 72,000 more households each year, according to a 2015 VantageScore study. That same research found that 16% more Hispanic and African-American households would have expanded mortgage access as a result.

Legislation of this nature has been circulating in Congress for years. In February, a bipartisan group of congressmen reintroduced the Credit Score Competition Act, which contains the same language as the Senate bill. Also in February, the Consumer Financial Protection Bureau put out a call for feedback on the benefits and risks of alternative credit data. The CFPB has estimated that 26 million people in the U.S. are “credit invisible,” meaning they don’t have a credit history with a consumer reporting agency, while another 19 million consumers don’t have an extensive enough credit history to get a credit score.

Traditional credit scores such as the FICO score only consider whether borrowers have paid debts such as mortgages, credit cards or other loans. Alternative credit scores like VantageScore meanwhile look at a broader range of data to determine creditworthiness such as cellphone bills, utility payments and rental payments. It is estimated that using credit scores beyond FICO would open up access to credit for roughly 72,000 more households each year, according to a 2015 VantageScore study. That same research found that 16% more Hispanic and African-American households would have expanded mortgage access as a result.

And some remain skeptical that a shift toward alternative credit scoring will have its intended effect. The National Consumer Law Center (NCLC), a nonprofit based in Boston, has argued that simply adding the alternative data to the mix could end up hurting some consumers who already have credit scores, and that the accuracy of this data isn’t as assured. Additionally, they argue that alternative credit scores don’t resolve issues related to income inequality in minority communities where many are “credit invisible. ”Lower wages also can result in lower credit scores when consumers are unable to afford financial setbacks such as job losses or illnesses.

Data collected by the NCLC from the U.S. Energy Information Administration showed that 29.6% of African-American-headed households living at or below their state’s median income reported paying less than a total home energy bill “almost every month” or “some months” in 2009. Comparatively, only 17 of white-headed households at the same income level had trouble paying utilities bills.

FICO said that it supported a review by the Federal Housing Finance Agency of credit scoring models used by Fannie Mae and Freddie Mac, but the company cautioned against lowering standards in an effort to expand who can get a score.

“Delivering a credit score does not equate to creating access to mortgage credit,” FICO said in an emailed statement. “Lowering credit scoring standards in an effort to score more consumers does not address the challenge of consumers who do not have any or have insufficient credit bureau data to obtain a robust credit score and access to credit.”

Whether or not the bill gets signed into law, it may be a while before any meaningful changes occur. Melvin Watts, director of the Federal Housing Finance Agency, which regulates Fannie and Freddie, said in a speech Tuesday that any credit scoring change wouldn’t go into effect until 2019 because of other more pressing priorities.

Consumers have already seen some credit score relief in recent months. On July 1, the three nationwide consumer reporting agencies — Equifax EFX, -2.13% , Experian EXPN, -0.26% and TransUnion TRU, -0.30%enacted a new policy regarding how they collected information from public records to include in credit reports. The change was estimated to raise 12 million consumers’ credit scores by an average of 10 points.