According an article in the Wall Street Journal, on August 13, the Federal Housing Finance Agency (HFHA), which supervises Fannie Mae and Freddie Mac, has sent to the Federal Register for publication a final rule on the validation and approval of third party credit score models that can be used by Fannie and Freddie. When this rule is fully implemented, it appears the primary beneficiary of this rule will be the Vantage Scoring system which is a credit scoring system created by combining data from Trans Union, Experian and Equifax. Prior to this rule, the only credit scoring system Fannie and Freddie could use is Fair Isaac.
There are several similarities between FICO scores and Vantage scores two of which are shown in the tables below.
Credit Score Ranges
|Fico Scores||Value||Vantage Scores||Values|
- Note that Vantage scores are about 50 points lower than FICO scores which may allow credit decision approvals with lower credit scores.
- Additionally, as shown in the table below, variable weights are also similar.
|Fico Factor||Weight||Vantage Factor||Weight|
|Credit History||35%||Payment History||40%|
|Credit History Length||15%||Age/Type of Credit||21%|
|Mix of Credit||10%||Available Credit||3%|
|New Accounts Opened||10%||Recent Credit||11%|
Key Differences in FICO versus Vantage Scores
- FICO scores:
- are used by more banks
- are considered to be more conservative
- are more variable than Vantage scores due to data issues among reporters and fees from Fair Issacs.
- emphasize types of credit used, payment history and total debt.
- require trade lines be at least 6 months old with activity on at least one trade line during the previous 6 months.
- Vantage scores
- assess credit risk better for consumers that don’t use credit frequently or have high credit utilization: young adults, persons with no credit in their own name, new immigrants, previous bankrupts, persons with thin files, new entrants into the banking system.
- emphasize borrower debt to credit ratio, recent inquiries, credit utilization trends and new accounts.
- customer inquiries are a smaller deduct from the overall credit score in the Vantage system.
- score an applicant if there is any activity in the last 24 months
- look back and consider the applicant’s utilization trend
Possible fair lending impacts
- Each scoring system seems to appeal to its own constituents. As indicated above, Vantage scores may appeal to individuals that don’t use credit often, have high credit utilization or that are new entrants into the financial system. On the other hand, FICOs are widely used and are considered to be more conservative with respect to credit risk.
- If Vantage scores are ultimately approved for usage by Fannie and Freddie, in a regulatory environment where putting families into homes is important as a source of building personal wealth, Vantage scores may be more popular with the regulators which suggests banks may need to understand the impact of using Vantage scores in their underwriting systems versus using FICO scores. In other words, banks may need to assess the impact on their mortgage denial rates of using one scoring system versus the other.