Credit Score Facelift by Brianna Gilpin

As the years go by, technology progresses. New computers and cellphones, more efficient ways of handling paperwork—but what about credit reporting? According to the Urban Institute, who has written multiple times on tightness of mortgage credit, the mortgage market is taking on less than half of the risk it was in 2001 and less than a third of the risk in 2006. This can be attributed to the current credit score model, which is outdated.

FICO 4, which was created in the late 1990s, is much less granular than the more recent models, FICO 9 and VantageScore 3, which is soon to be dated compared to VantageScore 4.0 coming out in the fall. FICO has versions 2, 3, 4, 5, 8, and now 9, so why is FICO 4 still the GSE requirement for originators to use?

For example, student loan debt is included in installment debt in FICO 4 and first and second mortgages are seen as the same thing. The newer models also have a better wealth of information regarding student debt, which Urban Institute says has increased exponentially since the late 1990s. At the time, student loan debt was less than $100 billion, but as of Q1 2017 that number has risen to $1.34 trillion. In FICO 4 and VantageScore 3, student loans are looked at in a way that determines how it impacts the performance of other debt. Other reasons FICO 4 is outdated include issues concerning medical debt, and the consistency of information in reporting to more closely align the three models presently used—TransUnion FICO Classic 4, Equifax Beacon 5.0, and Experian/Fair Isaac risk Model v2.

In a statement about how the GSEs use the FICO 4 family of models for screening and loan level pricing adjustments, the Federal Housing Finance Agency (FHFA) said in its 2016 Scorecard for the GSEs that they continued to work with Fannie and Freddie on implementing additional or alternative credit score models with the Enterprises’ businesses.

“The Enterprises have considered other credit-score-related issues that can independently improve access to credit,” the statement said. “As described above, this includes the Enterprises work to enhance their automated underwriting systems to process loans for borrowers who do not have a history of traditional credit and, therefore, lack credit scores.”

According to the Urban Institute, these credit scoring models that are used by the GSEs and lenders who sell to them need to be updated.

“The updated models have already been developed; its time to conclude the ongoing studies and modernize the system,” Urban Institute said in the report. “Incorporating newer models into the mortgage origination process would allow the market to serve a greater number of creditworthy borrowers seeking to purchase a home.”

Urban Institute isn’t the only one with this issue on their mind. Tuesday, Senators Tim Scott (R-South Carolina) and Mark Warner (D-Virginia) introduced bipartisan legislation that has received support from 20 consumer and industry groups to get the FHFA to create processes for credit scoring models to be validated and approved for use by the GSEs when they purchase mortgages. The current credit scoring model doesn’t take into account rent or utility payments and therefore hurts African-Americans, Latinos, and young people who otherwise would be approved.

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