Credit scores have become an integral part of our financial lives. A great score can be used to leverage great deals — on loans, credit cards, insurance premiums, apartments, and cell phone plans. Bad scores hammer you into missing out or paying more.
Making sure credit decisions are based on the best available information is absolutely key to ensuring accuracy and fairness. Keeping politics out of credit scoring is a must.
Which is why the pronouncement this summer by William Pulte, the Director of the Federal Housing Finance Administration (FHFA), that he was going to allow lenders can now use Vantage 4.0 (a credit scoring model developed by the three major credit reporting bureaus — Experian, Transunion, and Equifax) to “lower the cost of credit checks,” is both unusual and concerning.
First, the agency FHFA is in the middle of transitioning the housing government-sponsored enterprises (GSEs) (Fannie Mae and Freddie Mac) from the FICO Classic credit score for each mortgage they purchase to using both FICO 10T and VantageScore 4.0 credit scores. This change is mandated by law.
The Pulte proclamation seems to have skipped the normal regulatory process set forth under the Administrative Procedures Act (for example, the change was made without even an expedited notice-and-comment rulemaking), and also halted the shift from FICO Classic to FICO 10T — even though 10T is designed to provide lenders with a more accurate and dynamic assessment of credit risk by incorporating trended data such as recent payment activity.
Second, the FHFA and the GSEs had already validated both VantageScore 4.0 and FICO 10T. Yet Pulte is only letting the GSEs use VantageScore 4.0 to be used (along with FICO Classic). Why, because supposedly, the historical data is still being collected for FICO 10T.
But why would the federal government give one credit score the upper hand over another?
We don’t know the answer, but one concern PPI noted when the issue of allowing for an alternative to FICO was first raised was the ownership of Vantage. At the time, proponents of Vantage argued that requiring the use of VantageScore 4.0 was needed to provide more competition and innovation in credit scoring. More competition can bring down costs and spur investment and innovation. But the problem is that VantageScore is owned by the three credit bureaus (Experian, Trans Union, and Equifax). Whether intentionally or not, the credit bureaus have a natural bias in favor of VantageScore 4.0 over FICO. This is why PPI has recommended that the three credit bureaus sell their stake in VantageScore.
Third, the cost of credit scores is a tiny fraction of the overall closing costs. And as economist Douglas Holtz-Eakin noted, there is no readily available information on what VantageScore charges and how its price compares to FICO.
Furthermore, the Pulte announcement could actually lead to higher costs for homebuyers. Investors may price in any perceived risk if they think that mortgage originators made the loan with the least favorable credit score.
There are serious ideas to address this problem that members of both parties will have to make, such as reducing barriers to manufactured housing. The Pulte announcement on VantageScore is not one of them.
