On February 7, Representative Ed Royce (R-CA-39) reintroduced the Credit Score Competition Act, which would require Fannie Mae and Freddie Mac (the Government-Sponsored Enterprises, or GSEs) to consider alternative credit scoring models in their mortgage purchasing decisions.
What Does the Bill Do?
At present, the GSEs exclusively rely on an older FICO credit scoring model to make mortgage purchasing decisions. In a press release, the bill’s sponsors argue that “when coupled with the GSEs’ overwhelming dominance of the secondary mortgage market, the result has been a government-backed monopoly in credit scoring.” They believe this legislation could break up that monopoly by fostering competition and innovation within the industry.
Specifically, the bill provides the GSEs with the authority to use credit scores produced by alternative scoring models in “all of its automated underwriting systems and any other procedures and systems used to purchase residential mortgages”.
The Director of the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, would be given the authority to establish standards and criteria to be used to validate the various credit scoring models that apply for consideration. FHFA would then be required to conduct frequent oversight of the models that it decides are acceptable in order to ensure continued accuracy.
What Are Alternative Credit Scoring Models?
It’s important to remember that FICO is not the only company that produces credit scores. In fact, there are numerous competitors, including a very familiar name: VantageScore, a joint venture owned by the credit bureaus Experian, Equifax, and TransUnion that hopes to break FICO’s dominance in the credit scoring industry. Competition among model developers ensures innovative ideas are continually being brought to market. New models may take into account a variety of factors that are not included in FICO scoring, including “sources such as bill payments for mobile phones and rent, and electronic transactions such as deposits, withdrawals or transfers.”
When these sources of alternative data are risk-weighted by credit scoring models, a large number of individuals previously deemed ‘unscorable’ now have a score. Most industry estimates peg the ‘unscorable” number at around 50 million Americans. Many happen to be historically disadvantaged minority consumers without traditional banking relationships. As a result, “the problems that accompany having a limited credit history are disproportionately borne by Blacks, Hispanics, and lower-income consumers.”
Will This Bill Succeed? (And Does That Really Matter?)
Yes, the bill failed during the last Congress. Yes, this new version has the exact same language. Yes, it was put forth by the exact same sponsor, and yes, even the press release from 2017 is almost the exact same as the one from 2015.
However, the November elections brought a drastic shift in priorities to Washington, D.C. A Republican-controlled Congress may place more emphasis on expanding access to credit as part of their broader financial agenda, as evidenced by a recent House Financial Services Committee hearing entitled “Examining Legislative Proposals to Address Consumer Access to Mainstream Banking Services." Coupled with a new Request for Information on alternative data from the Consumer Financial Protection Bureau (CFPB), this bill could be placed on the legislative calendar sooner than previously expected.
However, even if this bill never comes to pass, does that mean it has failed? To borrow a quintessential Washington, D.C. response: yes and no. Sure, the bill technically fails if it never makes it to the president’s desk. But not every bill introduced on Capitol Hill is intended to go the distance; many are simply meant as ‘messaging bills,’ the purpose of which is to raise a specific point or push along a message that exerts pressure upon a particular body, in this case the FHFA. Recent iterations of the FHFA’s Annual Scorecard have outlined an obligation to study alternative scoring models. Representative Royce would no doubt like for his bill to pass, but we can infer one motive for introducing this bill, and that is to place public pressure on the GSEs to move forward and finish the review required by the Annual Scorecard. This bill also pushes the GSEs toward the representative’s desired outcome, which includes the approval of multiple scores in order to increase the options available to originators, and promote competition and innovation within the general marketplace.
The CoreLogic Office of Government and Industry Affairs will be tracking the Credit Score Competition Act as it moves through the legislative process. For future updates or general inquiries, you can contact us any time at GovernmentAffairs@corelogic.com.
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