All Scores Considered: Using Variety to Your Advantage

In August, the Federal Housing Finance Agency (FHFA) issued a new and final rule requiring government sponsored mortgage enterprises (GSE) — specifically Fannie Mae and Freddie Mac — to consider credit score alternatives to the current, dominant score in the market when determining a mortgage applicant’s creditworthiness. This is a coup for VantageScore® and TransUnion®, as it replaces a December 2018 rule proposed by the FHFA prohibiting the use of any credit score model developed by a company affiliated with a credit reporting agency.

As we know, credit scores play an important role in determining who qualifies for a mortgage and on what terms. Non-bank lenders have been lobbying the FHFA to allow credit scores like VantageScore from TransUnion — an independently validated model that may open the market to a plethora of potentially qualified homebuyers, supporting a boost in safely underwritten home sales. The value of VantageScore credit scores has already proven beneficial in other lending markets, such as auto and credit cards, where consumers have enjoyed greater financial inclusion while lenders are able to safely address larger populations. The mortgage industry and its consumers may also benefit from credit scores that perform as well as or better than the incumbent model. Therefore, the FHFA’s decision is a win-win-win for consumers, lenders and the economy as a whole.

Certain VantageScore credit scores use TransUnion trended data to produce a score that reflects consumers’ credit history and behaviors over time, versus a momentary snapshot. As well, it offers inclusive scoring for people with thin credit files, as a limited history doesn’t necessarily indicate less creditworthiness. As homeownership is still one of the most sought-after financial goals for the American consumer, lenders need tools that more effectively measure individual risk so potentially safe lending opportunities aren’t squandered. We all want to avoid a repeat of what happened when credit score requirements were lowered to extend mortgages to subprime borrowers.

Understandably, after the Great Recession of 2008, lenders tightened requirements — which narrowed the borrowers seen as risk-worthy. That led lenders to seek other scores that could safely expand their pool. Fast forward to August 2019 when the final FHFA ruling was handed down. But what does this mean for TransUnion’s lending customers? A lot!

First and foremost, it means more opportunity and more level competition. Fannie and Freddie sponsor roughly 44% of mortgages in the U.S., which have been scored using the current, mortgage-market dominant score. If someone wants a loan, this is still the only route — for the time being. With the new rule, that 44% and more, can be scored with VantageScore from TransUnion, which means our customers can offer their customers another choice. According to TransUnion’s Senior Vice President and mortgage business leader, Joe Mellman, “The FHFA’s decision to allow the consideration of multiple, validated scoring models is creating heightened interest in VantageScore credit scores amongst mortgage lenders. Engaging this momentum is a top priority for TransUnion in 2020.”

Nearly every industry operates under the assumption that competition benefits everyone. Going forward, scoring models such as VantageScore from TransUnion — that offer more predictiveness and inclusivity — will be a feasible option. These models expand the scorable population, enabling lenders to more safely and soundly consider approximately 40 million more consumers previously deemed unscorable (i.e., those new to or with thin-file credit). These consumers won’t be penalized and can be seen as viable and competent borrowers, allowing them to pursue mortgages with more confidence of being approved. And all consumers will be empowered not only by new scoring choices but by having more control over how their credit scores evolve and are viewed.

The point is, scores that consider broader, deeper information regarding consumer credit history and patterns provide a more complete and accurate picture of financial capabilities. Traditional scoring methods result in scores that potentially contain financial scars from years past. It doesn’t seem logical to only refer to these scores when fresher, more complete information is available. Trended data helps lenders build better risk models and make reliable decisions regarding more individuals, opening up opportunity — on both sides.

That’s not to say regulators shouldn’t keep a close eye on alternative scoring models and offer clear guidance on how they’re used — to ensure financial stability is maintained. The mortgage debacle of over a decade ago will not soon be forgotten, but with more granular data — the kind found in newer, alternative scoring models — lenders have richer context to draw upon when making decisions.

Bottom line, the Federal Housing Finance Agency has publicly acknowledged the value alternative scoring models hold for lenders, consumers and the economy. FHFA Director, Mark Calabria relayed, “One of my priorities is to ensure that the American people have a safe and sound path to sustainable homeownership, which requires tools to accurately measure risk.” Calabria referred to the new rule as “an important step toward achieving that goal.” TransUnion is pleased to see the FHFA backing its mission of ensuring Fannie Mae and Freddie Mac operate safely and soundly, and promoting fairness within housing finance and community investment — so more people can achieve homeownership.