FHFA credit score model needs adequate cost-benefit analysis

March 21, 2019

The ability of the housing finance system to accurately assess credit risk while responsibly expanding access to affordable mortgage credit for consumers is a key concern for credit unions and the members they serve, CUNA wrote to the Federal Housing Finance Agency (FHFA) Thursday. The FHFA released a proposal on credit scoring in response to provisions in the Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155) directing it to establish a “validation and approval process for the use of credit score models.” 

Specifically, FHFA’s proposal would establish requirements for the validation and approval of third-party credit score models by Fannie Mae and Freddie Mac.

“CUNA recognizes and applauds FHFA’s efforts to propose and establish new requirements to govern the GSE’s validation and approval of credit-scoring models,” the letter reads. “Ultimately, it is critical that the FHFA’s final rule strike the appropriate balance between increasing competition in the credit-score market, preserving competition in the lender market by not, unintentionally, decreasing smaller lenders’ access to liquidity from the secondary market due to increased costs, and ensuring both consumers and lenders have certainty and predictability about the use of credit scores in their conventional mortgage decisions.

“That balance can only be properly achieved by requiring a robust cost-benefit analysis that includes pricing impact on lenders,” the letter adds.

CUNA believes that increased market competition in the credit-score industry could be beneficial to both consumers and lenders because it can improve efficiency, decrease pricing and potentially expand the market of consumers for mortgage products.

“But we also acknowledge that the frequent modification of the GSEs credit-scoring models or a requirement that they use multiple models at the same time could discourage competition in the lending market by increasing costs for smaller lenders less capable of quickly and cost-effectively absorbing those changes into their own underwriting systems or paying the resulting increased prices to access the systems of the third-party vendors they rely upon,” the letter reads.