New credit score models, FICO 10T and VantageScore 4.0, to improve accuracy and expand access.

The federal government is expanding how it collects credit scores, which may allow more Americans to potentially buy homes. The Federal Housing Finance Agency announced at the Mortgage Bankers Association’s annual conference that it had approved two credit score models, the FICO 10T, and the VantageScore 4.0, for use by Fannie Mae and Freddie Mac. “The enterprises have long relied on classic FICO, and it has met their basic needs,” Sandra Thompson, director of the FHFA, said, but “it is time to recognize the significant innovations that have occurred in credit score modeling.” VantageScore President and CEO Silvio Tavares said that the decision to include the company’s credit model “ushers in a new and more equitable era of financial inclusion” and added that the “FHFA’s action will enable millions more credit worthy Americans to have access to mortgages.”

Fannie and Freddie were institutions created by Congress, and are federally-backed mortgage institutions. They guarantee most of the mortgages made in the U.S., so many lenders follow the rules set out by Fannie and Freddie when they give mortgages to borrowers. For the last two decades, Fannie Mae and Freddie Mac have relied on scores created by FICO, or Fair Isaac Corp., to understand borrowers’ ability to repay mortgage loans. Credit scores not only affect the underwriting of loans, they also impact the pricing of loans. With FICO 10T and VantageScore 4.0 replacing Classic FICO, the belief is that the credit scores reported will be more accurate and inclusive, the FHFA said. Both FICO 10T VantageScore will look at a broader range of payment history data for borrowers, from cell phone bills to utility and rental payments, to determine credit worthiness. The more accurate credit scores are, the better understanding of risk that the market and investors get. That also potentially expands access to credit for borrowers with “less robust credit histories,” Thompson said. Using credit scores beyond FICO would open up access to credit for roughly 72,000 more households each year, according to a 2015 study by VantageScore. Additionally, 16% more Hispanic and African-American households would have expanded mortgage access. 

Source: MarketWatch