Compliance: Final FHFA rule on alternate credit scores
The Federal Housing Finance Agency (FHFA) published a final rule in August that presents the standards, criteria and process that Fannie Mae and Freddie Mac (Enterprises) will use to validate and approve third-party credit score models.
The final rule is effective Oct. 15, 2019, but FHFA anticipates the process of approving an alternative credit score model will take up to 26 months, a timeframe that doesn’t include implementation of any approved model.
FHFA has stated that, based on years of related credit score work, it will take the industry approximately 18-24 months to adopt a new credit score model after a model has been approved.
Fannie Mae and Freddie Mac currently require lenders to provide credit scores derived from the Classic FICO credit score model for each loan delivered to Fannie or Freddie and said it expects the Classic FICO to meet the criteria for approval based on its history of use.
If Fannie or Freddie conditions its purchase of a mortgage loan on the provision of a borrower’s credit score, the score must be produced by a model that has been validated and approved through the following process:
- Solicitation of applications from credit score model developers, where the Enterprise will describe what information is needed, timeframes, criteria for validation and approval, how will the Enterprise obtain data for testing and any additional approved information;
- Submission and initial review of applications, where the Enterprise will determine whether each application is complete and includes all required, and if not, will notify the applicant of any additional information that is required.
- Credit score assessment, where each credit score model with be assessed for accuracy, integrity and reliability independent of the use of the credit score in the Enterprise’s system; and
- Enterprise business assessment, where the Enterprise will assess the credit score model in conjunction with the Enterprise’s business systems and processes.
For a credit score model to be approved for use, the model must pass both a credit score assessment and an Enterprise business assessment. FHFA then reviews a proposed determination by an Enterprise for use of the credit score model and will either approve or disapprove the proposed determination. If an application is approved by FHFA, the Enterprise must follow through with a final determination to approve the credit score model for use in its systems.
A detailed analysis of the final rule and its effects can be found on CUNA’s CompBlog. The entry also features links to the final rules itself, and fact sheet from FHFA on the final rule.