Mortgage borrowers and bankruptcy

Representative credit score proposal could exclude lower income borrowers

May 12, 2023

CUNA supports the Federal Housing Finance Agency’s proposed amendments to its Enterprise Regulatory Capital Framework, including its change to the determination of representative credit scores, but is concerned validations of these methods are based on Classic FICO credit scores instead of newly approved scores friendlier to lower-income borrowers.

The FHFA proposes changes to the determination of the “representative” credit score for an individual loan in in anticipation of its move away from requiring three scores (a “tri-merge” score based on the median) to two scores (a “bi-merge” score based on an average). This move away from a tri-merge score was announced last fall.

“In general, credit unions expressed no concern about this approach regarding the Classic FICO score. However, credit unions did express concern that by averaging a borrower’s Classic FICO score with a FICO 10T or VantageScore 4.0 score the resulting average score may be misleading,” the letter reads. “Loans to borrowers whose creditworthiness is best captured through the FICO 10T or VantageScore 4.0 scoring models may appear to pose more risk than they actually do.”

The letter adds that FHFA’s validation study appears to have been performed solely using Classic FICO scores.

“It is difficult to say whether the impact of average credit scores across models could be far more significant than the results of the FHFA’s validation as described in the proposal,” the letter reads. “The FHFA should validate this approach across all approved scoring models before implementing this approach.”

CUNA also expresses concerns that the combination of a rise in prices and additional score requirements from Fannie Mae and Freddie Mac have led to a significant increase in the cost of credit reports.