FHFA delays bi-merge credit transition following industry concerns

The Federal Housing Finance Agency (FHFA) on Monday announced that it will offer additional opportunities for public engagement as it considers the transition to updated credit score models and credit report requirements for loans acquired by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

The new opportunities will include stakeholder forums and listening sessions, and will allow for other issues, opportunities and challenges to be debated by stakeholders and other participants ahead of the implementation of the new requirements, the agency said. Part of what will be discussed includes issues from “potential refinements to the timeline for adoption,” according to FHFA.

“This engagement process represents the next logical step in our efforts to ensure robust public input as we work towards implementing the new credit score requirements at the Enterprises,” said FHFA Director Sandra Thompson in a statement. “We want to hear from market participants and impacted stakeholders to ensure a smooth transition that minimizes costs and complexity.”

In March, FHFA announced proposed implementation timelines for the use of the FICO 10T and the VantageScore 4.0 credit score models by Fannie Mae and Freddie Mac. The government-sponsored enterprises also planned to transition to two, rather than three, credit reports from the national consumer reporting agencies within one year.

The agency initially planned to finish gathering industry feedback by the second quarter of 2023 and was set to implement a bi-merge system in the first quarter of 2024. The original timeline also called for the FHFA to begin delivering and disclosing FICO 10T and VantageScore 4.0 historical data to support credit model updates in the first quarter of 2025. By the fourth quarter of 2025, the FHFA was to have incorporated credit score model updates into capital and pricing.

The move to a bi-merge system from a tri-merge system has been pushed back, though the FHFA didn’t specify when it was now slated to occur. The FHFA also did not disclose a revised implementation target for Fico 10T and VantageScore 4.0 credit model updates, but presumably it will also be pushed back.

Mortgage trade groups applauded the agency for the longer implementation timeline.

“FHFA’s reformulated implementation plan is an acknowledgment of the significant operational complexities and the magnitude of this effort on the housing finance system, consumers, and investors of mortgage assets,” said Bob Broeksmit, president and CEO of the Mortgage Bankers Association. “MBA has advocated for a longer implementation timeline, and we appreciate FHFA taking our recommendations to heart.”

MBA continues to support FHFA’s “efforts to ensure better competition in the credit scoring space,” and described a willingness to work with the agency to ensure that “costs, complexity, consumer impact, and policy implications are taken into consideration,” Broeksmit added.

Echoing the positive sentiment was the Community Home Lenders of America (CHLA), according to a statement from Scott Olson, its executive director.

“CHLA commends Director Thompson for announcing public listening sessions on the transition to updated credit score models and credit report requirements for loans acquired by Fannie Mae and Freddie Mac,” Olson said. “CHLA recently sent a letter publicly supporting FHFA and encouraging them to slow the implementation of the credit score process. We look forward to continuing to work with Director Thompson, and her staff, at developing a credit scoring model for the GSEs which support and protects all borrowers.”

At a hearing in May, members of Congress asked Director Thompson about the move to transition to two credit reports as opposed to three, in what’s called a “bi-merge” credit model. Thompson said that the rationale is that such a move would benefit consumers.

“We believe after analysis that moving from three credit scores to two is going to be beneficial for the borrowers, and it will encourage competition from the credit reporting agencies,” Thompson said during the May hearing. “And it would lower costs for the borrowers because instead of three credit reports, they only pull two, and then the lender picks which two those are.”