This year, the Federal Housing Finance Agency (FHFA) made the quite significant decision of abandoning the time-tested and proven single credit score model used by lenders issuing mortgages backed by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. By dumping the model that has been the cornerstone of lending for decades, FHFA has mandated that lenders issuing mortgages backed by GSEs must obtain two different credit scores for each applicant.
My organization, Consumer Action for a Strong Economy (CASE) warned of the risks inherent in introducing the untested VantageScore into an uncertain and turbulent housing market when government regulators’ top priority should be lending safety and security. While FHFA works on implementing two scores into the aforementioned one-score system, the inevitable pitch to consumers and lenders has begun. That marketing campaign never hints that the change could be harmful to our precarious housing market or hurt lenders and consumers alike.
Since FHFA announced its decision in October 2022, VantageScore has launched a massive public relations and marketing effort. One should expect that the promotion of an entirely new financial product that has the potential to negatively affect an industry essential to our economic security be responsible and accurate. Sadly, that is far from the case.
Especially troubling are VantageScore’s claims they are fostering an “opportunity for homeownership for millions more Americans” by having created a more reliable and “inclusive” lending score for millions of people without a sufficient history of credit.
It is critical these assertions are analyzed, given their enticing overtures to consumers. A credit scoring model that relies on less data could certainly be more inclusive by scoring more people lacking credit history. But to say it is as reliable or even more reliable than the long-tested and proven model strains the bounds of credibility.
Scoring more people doesn’t mean all those people will receive the benefit of a good credit score or be given the opportunity to become a homeowner. Previously unscored people who receive a VantageScore could easily find themselves receiving a low credit score, which is actually worse than receiving no score at all. Instead of providing “opportunity,” millions could find themselves saddled by a score that flags them as a big credit risk.
Lenders likewise will face confusion, to accompany the billions of dollars in added costs the industry will undertake to accommodate two separate scores. It has yet to be worked out how lenders will handle the disparity in risk assessment between two different scoring models. The requirement to pull two scores for each mortgage applicant adds an unneeded level of uncertainty, which means added risk in lending.
What VantageScore has asserted quite publicly is that selling this new score is very profitable, providing insight into why they created it. No weakness of the current scoring model can be noted by VantageScore or any stakeholder in the lending industry, including banks and GSEs. It is fair to conclude that any move away from the industry standard opens the door for the possibility of substantial risk for both lenders and borrowers.
FHFA has stated throughout this process that their main concern was minimizing risk and ensuring safety and stability in the housing market. That is as it should be. But nowhere is anyone asking the hard questions, specifically how risk is minimized through the use of an unproven scoring model that has yet to offer an iota of evidence it presents an improvement or better predictability over the current scoring model.
We all sadly remember what happened back in 2008 when consumers were lured into biting off more housing debt than they could reasonably handle. No one wants a recurrence of those dark days. It is time for stakeholders, including FHFA and the Consumer Financial Protection Bureau (CFPB), to step in, clear the air, and start raising questions and concerns about these suspect pronouncements that misrepresent how credit scoring and lending work.
FHFA’s primary mission is to ensure safety and security, while minimizing risk, in mortgage lending. One can only hope that they, the CFPB, and other regulators in this space take a more active role in calling out VantageScore's misleading marketing. Allowing these unsubstantiated claims to circulate not only causes undue pressure on lenders, but gives false hope to millions of Americans eager for the opportunity of home ownership.
