FHFA Validates Classic FICO, Extends COVID-19 Provisions
Written By: Joel Palmer, Op-Ed Writer
The Federal Housing Finance Agency (FHFA) has validated the continued use of Classic FICO by Fannie Mae and Freddie Mac, but said it will take another year to validate and approve alternative credit scoring models.
“The validation and approval of Classic FICO by the enterprises allows them to continue supporting the mortgage market while assessing more modern credit score models that were submitted in response to the 2020 Joint Enterprise Credit Score Solicitation," the FHFA said in a statement.
Credit score model proposals had to be submitted by September 15, 2020.
Last week’s announcement is the latest development in a prolonged process of enabling new credit scoring models. The GSEs currently only use Classic FICO, also known as FICO 4, which many critics say is an outdated model.
One of those critics is the Consumer Financial Protection Bureau (CFBP), which will soon report to the newly elected Biden Administration. Last year, CFPB shared highlights that found an alternative access-to-credit model could approve 27 percent more applicants than the traditional model while also resulting in a 16 percent lower average APR for approved loans.
This assessment came a year after FHFA tabled an initiative to change credit scoring models used by Fannie Mae and Freddie Mac. This occurred after the agency requested input on using FICO 9 and VantageScore 3.0.
In December 2018, FHFA released a proposed rule to validate and approve third-party credit score models. The proposal was required by Section 310 of the Economic Growth, Regulatory Relief, and Consumer Protection Act enacted in May of that year.
“The validation and approval of the Classic FICO credit score model is an incremental step in meeting the requirements outlined in Section 310 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which stipulated a November 20, 2020 deadline for the enterprises to use a validated and approved credit score model,” said FHFA in last week’s statement.
FHFA said all credit score models will be evaluated based on accuracy, reliability, and integrity, as well as impacts on fair lending and the mortgage industry.
In addition to the credit score announcement, FHFA also extended several provisions enacted due to the COVID-19 pandemic. The following provisions, which were set to expire November 30, 2020, were extended to December 31.
FHFA extended the following loan origination flexibilities:
Alternative appraisals on purchase and rate term refinance loans.
Alternative methods for documenting income and verifying employment before loan closing.
Expanding the use of power of attorney to assist with loan closings.
The agency also approved an extension of a temporary policy that allows for the purchase of certain single-family mortgages in forbearance that meet specific eligibility criteria as set by Fannie Mae and Freddie Mac.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
