According to members of congress, mortgage giants Freddie Mac and Fannie Mae, due the singular use of the FICO credit scorecard, have been effectively granted a monopoly on their credit scoring system. This has led to the proposal of the H.R. 4211 bill, titled the “Credit Score Competition Act of 2015,” that would seek to break the FICO hold on GSEs.
The bill allows Fannie Mae and Freddie Mac to consider alternative credit-scoring models instead of just FICO, opening up millions of Americans to the opportunity to purchase homes even if their credit does not meet the current standards.
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The bipartisan bill allows Fannie Mae and Freddie Mac to consider alternative credit-scoring models instead of just FICO, presenting millions of Americans with the opportunity to purchase homes even if their credit does not meet the current standards. With Fannie and Freddie making up 90 percent of the secondary mortgage market, the use of a single credit scoring model has nearly created a monopoly in this field, according to the authors of the bill, U.S. Rep. Ed Royce (R-California) and U.S. Rep. Terri Sewell (D-Alabama) — both members of the House Financial Services Committee. Royce and Sewell have also suggest that additional credit scoring models would “foster competition and innovation in the credit scoring industry.”
“The GSEs’ use of a single credit score is an unfair practice that stifles competition and innovation in credit scoring,” said Rep. Royce. “Breaking up the credit score monopoly at Fannie and Freddie will also assist them in managing their credit risk and decreases the potential for another taxpayer bailout.”
Already the use of alternative data sources to build new models has been hailed within the automotive lending industry, but with the high value of housing loans, the industry seems slow to adopt new models. FICO, for its part, has insisted the idea of the “credit score monopoly” is a myth.
“There is no monopoly; instead there is a decision process well underway in order to make a determination what scores will be most beneficial for the GSEs to use within their business,” said Joanne Gaskin, Senior Director, Scores & Analytics at FICO. “FICO happens to be just one input to the overall automated underwriting process.”
Gaskin pointed to the fact that FICO “fully supports the evaluation process” concurrent with the proposal of the bill, and emphasized that they were developing newer, more accurate models integrating alternative data and granting more consumers access to credit.
“It is an approach to drive as much value out of the data that exists in order to make the most predictive score for origination purposes,” said Gaskin. Even with these assurances, many in both congress and the market are calling for the free use of alternative scoring models to break up the hold on GSEs by FICO.
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