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US considers mortgage credit check shake-up: Critics complain current system outdated and locks millions out of home ownership

By Alistair Gray

A new fight for a share of the lucrative US credit scoring market has broken out as Washington considers the first big change for about two decades in the way would-be mortgage holders are assessed.

Fannie Mae and Freddie Mac, the government-controlled groups that guarantee US mortgages, have for years required lenders to use a system developed by analytics software company FICO to determine the creditworthiness of prospective borrowers.

Critics complain the checks are outdated and lock millions of Americans out of home ownership. Almost 45m individuals do not have a regular credit score, according to a 2015 study by the Consumer Financial Protection Bureau.

Now the Federal Housing Finance Agency, which oversees Fannie and Freddie, is looking at opening up the market. It is seeking views about changing credit score requirements, potentially using an alternative metric from FICO’s main rival VantageScore.

The review poses another potential challenge to New York-listed FICO’s dominance of US consumer credit ratings. Its algorithm aims to predict how likely consumers are to repay their debts by examining factors such as payment history, rating them on a scale from 300 to 850.

FICO is still used in the vast majority of credit decisions in the US, although the big three credit reporting companies — Equifax, Experian and TransUnion — developed a rival model, VantageScore, that has made inroads in credit cards and other areas outside mortgages.

VantageScore has seized on the FHFA’s review to call for an end to FICO’s stranglehold on the mortgage market. “Monopolies never benefit markets or consumers and they create the opportunity for pricing power unchecked by competition,” it said.

However, FICO has hit back, highlighting that unlike VantageScore it is independent of the three credit reporting companies that collate the underlying financial data about consumers.

“FICO welcomes competition — we just want to have fair competition,” said Joanne Gaskin, senior director at the company. She also questioned whether lenders would expand credit responsibly simply by switching to VantageScore.

 “Our competitor is claiming millions [of borrowers] would get through the door” if it were used, she added. “All of our data would suggest absolutely the otherwise.”

FICO has a newer version of its model that it says provides a more sophisticated analysis of creditworthiness than the earlier system currently required by Fannie and Freddie.

The FHFA is considering a series of options, including adopting scores from both FICO and VantageScore or giving lenders a choice. 

Charles Gabriel, who runs the policy analysis group Capital Alpha, said there were also concerns about the costs if Fannie and Freddie demand additional scoring methods — with questionable benefits.

Alternative models, he said, “will still be based on the same repayment-history data that Experian, Equifax and TransUnion already provide”. 

The FHFA is seeking comment until February.

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