Fannie, Freddie urged to adopt more up-to-date credit scoring models

Some financial and credit industry groups have urged Fannie Mae and Freddie Mac to open their systems to more inclusive scoring models.

Some financial and credit industry groups have urged Fannie Mae and Freddie Mac to open their systems to more inclusive scoring models.

(Manuel Balce Ceneta / Associated Press)

Are the two biggest players in the American mortgage arena — Fannie Mae and Freddie Mac — needlessly preventing millions of African Americans, Latinos and young consumers from qualifying for a loan because they don’t have a FICO credit score?

Some critics say the answer is an emphatic yes. James H. Carr, formerly a vice president at Fannie Mae and now a senior policy fellow with the nonprofit Opportunity Agenda, says the failure of both corporations to adopt up-to-date, more sophisticated credit scoring models has a “disparate impact” on minority consumers and is discouraging first-time home purchases.

Large numbers of Americans cannot be scored using the decades-old FICO models that are still mandatory at Fannie and Freddie, Carr says, and as a result they can’t qualify for mortgages.

Typically these are consumers who make minimal use of traditional forms of credit. They pay their bills for rent, utilities and cellphones, but none of these are reported to the national credit bureaus — Equifax, Experian and TransUnion. Many are young, just starting out in their careers. Disproportionately they are minorities.


Some civil rights and financial groups agree that to more fairly serve the full range of home buyers, the two dominant home lending corporations need to adopt the technologically superior and more inclusive models that are now available from Fair Isaac, developer of the FICO score, and its chief competitor, VantageScore.

The Vantage score is widely used by banks in the credit card and auto loan fields. Yet neither Fannie nor Freddie accept Vantage scores, they have not accepted any of the improved models offered by FICO since the housing boom and bust, and they do not appear to be in much of a rush to do so.

Here’s the problem: Without a credit score, most mortgage applicants are doomed to rejection by lenders who expect to sell loans to either of the giant corporations.

When consumers have little or no information on file, their credit data may be “unscoreable” and they must either forgo borrowing or use alternative lending sources that charge high or extortionate interest rates. But advanced scoring methods, as used in the latest Vantage and FICO models (Vantage 3.0 and FICO 9), are able to score greater numbers of people with so-called thin files, making them eligible for lower-priced loans.

VantageScore claims that its newest version can score 30 million to 35 million consumers who are currently unscoreable by the systems used by Fannie and Freddie. Of these consumers, roughly 10 million have scores that are near or exceed the minimums required by the two companies. Roughly 9.5 million of the newly scoreable consumers are either African American or Latino, and 2.7 million of these have scores that could open the door for them to qualify for a mortgage, assuming they meet income and underwriting criteria.

Some financial and credit industry groups have urged Fannie and Freddie to open their systems to more inclusive scoring models.

In a letter to the companies’ regulator this month, the National Assn. of Federal Credit Unions asked that lenders be allowed to use more “updated and accurate credit scoring models” to “expand access to mortgages for those consumers who are unable to be scored by the FICO model.”

In a letter to financial regulators, seven interest groups representing consumers, lenders and credit reporting companies said the mandatory use of FICO models “disenfranchises millions of potential well-qualified borrowers” who have thin files or are infrequent credit users.

Lisa Rice, vice president of the National Fair Housing Alliance, said in an email that her organization has “been pushing Fannie and Freddie for some time to test the VantageScore system so they can begin allowing lenders to use it,” at least in a pilot program.

So what are Fannie’s and Freddie’s takes on all this?

A spokesman for Freddie was noncommittal: “We study scoring model refinements on an ongoing basis,” he said.

Fannie Mae was slightly more positive and specific: “We are studying the costs and benefits of incorporating Vantage 3.0 or FICO 9 into our process,” spokesman Andrew Wilson said. However, he added, “we are confident that the tools we use today accurately consider a borrower’s credit history.”

Bottom line if you’re one of the millions with “thin” or unscoreable credit and would like to buy a home but are shut out: Don’t give up hope. Fannie and Freddie are at least thinking about adopting more advanced scoring techniques. That’s got to be a plus.

Distributed by Washington Post Writers Group.