As the world faces a pandemic and a looming economic slowdown, we remember the horrific damage of the 2008 recession and the fraudulent and risky mortgages that left many Americans underwater and damaged their access to sustainable credit. Now is the time to address this market dysfunction and learn from the past. We must look beyond the promises and truly understand what is being proposed.
The Federal Housing Finance Agency is currently in the process of implementing its new credit scoring rule, and the credit-scoring companies are getting ready to submit their scores for consideration to Fannie Mae and Freddie Mac in May. All three entities should use this opportunity to expand sustainable credit for the underserved.
Federal housing officials should follow the approach applied by former FHFA Director Mel Watt and current Director Mark Calabria when they wrote the credit scoring rule. While imperfect, that rule benefited from a commitment to detailed, thorough analysis and investigation of data and facts.
The stakes are extremely high for regular Americans. Credit scoring policy is critical to determining access to sustainable credit for consumers who have been traditionally locked out of or denied access to the housing market.
One issue we hope FHFA will tackle is the concept of a consumer’s “scorability.” We need a set of rules that incentivizes both credit scoring organizations and consumers to access accurate scores that set consumers on a pathway to sustainable credit over time — not a system that merely rewards credit scoring organizations for selling more scores.
This tension is found in a white paper released by VantageScore in 2014, where the company claimed that it provided a score to 30-35 million more adults than conventional scoring models. But there are two types of consumers who currently make up the “unscorable” population — the 25 million Americans with no traditional credit file, plus the 30-35 million Americans with inactive credit files or credit files with very little information. Neither VantageScore nor FICO can score the 25 million with no credit file using conventional methods. That means that the remaining 30-35 million were potentially scored with inactive or incomplete credit files. These consumers should not be saddled with bad credit scores unnecessarily, making it critical for us to understand the methodology for scoring this group.
Locking consumers into a low credit score is worse than giving them no score at all because it forces them into the subprime lending systems and makes them a target for predatory lenders and lead generators.
It’s better for financially fragile consumers to forgo getting a credit score at all and use the lenders manual underwriting systems developed by Fannie Mae and Freddie Mac. We are concerned that in the rush to score more consumers, many will be stuck with subprime scores. According to the VantageScore white paper, 7 million minority borrowers would receive a score below 600. It’s hard to understand how this would help improve homeownership for those people.
There are reasons to be hopeful, however. We were glad to see that the joint credit score solicitation document that was published in February by Fannie Mae and Freddie Mac included a request for reason codes that each credit scoring company uses. Reason codes serve as a window for consumers to understand key drivers of their score. According to VantageScore’s website reasoncode.org, it appears consumers might be denied a mortgage because they have never had a mortgage. This sort of financial cul-de-sac is especially troubling for underserved communities that are experiencing historically low rates of homeownership.
We need a simple, fair and responsible credit scoring process that does not unfairly punish middle and lower-income credit worthy and credit-ready individuals. We need this more than ever in today’s times.
As the Federal Housing Finance Agency and GSEs finalize their process and begin evaluating scores, we urge them to proceed as they did in writing the rule: conduct a thorough, detailed analysis of each score and the elements that each company uses to create a credit score; take a deep dive into understanding the true impact each score will have, especially on middle and lower-income consumers; and avoid choosing a scoring regime that will hurt consumers and stifle competition in the marketplace.
Sally Greenberg is the executive director of the National Consumers League, a private, nonprofit advocacy group representing consumers on marketplace and workplace issues.
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