FHFA To Replace Classic FICO With More Inclusive Credit Model

Sandra Thompson, the FHFA’s director, said during the recent Mortgage Bankers Association (MBA) Annual Conference that having two different credit score models will give investors a more accurate picture of risk and help them make better investment decisions.

Thompson stated that the newer models are much more inclusive, as they take into account “new payment histories for borrowers when available, such as rent, utilities and telecom payments.” 

The FHFA has long been an advocate for innovation and inclusion within the credit score model industry. However, a major change such as FICO 10T or VantageScore 4.0 will take years to implement completely and accurately. Therefore, this effort will require close coordination across all sectors of the industry.

To ensure an easy transition, FHFA said that the agency will conduct outreach to different groups affected by the change. In the future, when this update is implemented, lenders will have to include both FICO 10T and VantageScore 4.0 scores for each loan they sell to either Fannie Mae or Freddie Mac.

In addition to the new credit score models, FHFA also announced that enterprises will now require lenders to provide credit reports from two of the three nationwide CRAs instead of a tri-merge. This change should improve accuracy and reduce merge errors.

“We expect this change will reduce costs and further promote innovation while not compromising accuracy and predictiveness of a borrower’s ability to repay,” Thompson explained.

Including rent payments in mortgage underwriting would benefit Black households the most, according to a recent study by the Urban Institute.

The study showed that on average, Black households could see a 3.2% increase in future mortgage accessibility due to credit scores expanding to include rental payment history.