Scoring Model Changes Are Coming

Last week the Federal Housing Finance Agency (FHFA) announced approval of FICO 10T (released January 2020) and Vantage 4.0 (released fall 2017) scoring models.  Once rolled out, these will replace the older scoring models used today and that have been used for the last 20 years. According to the FHFA these new models will make credit scores more accurate and inclusive.

Why did the FHFA decide to do this? So that the Government Sponsored Enterprises (GSE’s) would be more in compliance with section 310 of the Economic Growth, Regulatory Relief and Consumer Protection Act. Section 310 directs Fannie Mae and Freddie Mac “to create a process by which other credit  models can be approved and validated for use in their mortgage purchase decisions.”

Right now there are a lot of unanswered questions as to how this is going to work. As has been stated this is going to be a “multiyear effort.” This means that most likely the earliest we will see this start to take effect will be in the 4th quarter of 2024.

Here is what we do know: once this is rolled out both approved new models will be required on all GSE backed loans. The Enterprises will also be going from a tri-merge to a bi-merge credit report. The big question here being that if only two bureaus are required, which two bureaus will it be? Is it something that the loan officer determines when credit is pulled? Or can they pull from all three bureaus and pick the two they want to use? All this is “unknown” at this point.

Let’s look at the differences between the two new models and what is used now.

  • Both models incorporate in some way alternative credit such as rent, utilities and cell phone payments. While the Vantage 4.0 incorporates all these options, FICO 10T will incorporate some rental history and the alternative credit that is used in the Experian Boost program so in this case with FICO 10T most of the alternative credit will only be factored into the Experian report.
  • Both models use Trended Data. This looks at a consumer’s credit habits over time (24 months) as opposed to being just a “snapshot” in time. It’s more of an expanded snapshot that goes back over a two-year period and looks at borrowers spending, borrowing and payment habits.

Using Trended Data could be a good and a bad thing for borrowers. These models no longer will score based on what your balances are today. They will look at balances and payment history and how they have moved over the last 24 months. Balances on everything from personal loans to revolving balances will be weighed more heavily as all the activity and changes from a 24-month period will be factored in. They also look at how the payments were made each month. Not just that they were made on time but were just minimum payments made or was it more then the minimum payment in an effort to pay down debt. Because both models look at Trended Data, which means that balances and late payments will have more of a derogatory impact than the current models do now.

Vantage 4.0 has a few other unique attributes. It will score a consumer with less than six months of history on an account. Let’s say a consumer has no credit except for one or two credit cards that have been recently opened. In most cases this means they will have no scores. FICO doesn’t generate mortgage scores until there is 6-8 months worth of history on an account. Vantage 4.0 will generate a score after just one month of history. It also ignores all paid collections as opposed to just paid medical collections, and it places less importance on unpaid medical collections.

Both of these models contain attributes that will be beneficial to some borrowers and not so beneficial to others. With the inclusion of alternative data, it could also open the playing field to some borrowers who otherwise might not have qualified for a loan. Because of the use of Trended Data, consumers who already have good credit and have exhibited good credit “habits” will likely see a boost in their scores.  Consumers who have struggled with credit issues will most likely see a drop in their scores with the new models.

Over time all the questions this move is generating will be answered. As noted before, it will most likely be late 2024 before we even start to see any changes, but the changes are coming.