After a years-long effort, the Federal Housing Finance Agency (FHFA) has announced the approval of both the FICO 10T and the VantageScore 4.0 credit score models for use by Fannie Mae and Freddie Mac (Enterprises). The FHFA expects the transition to the two-score model to take multiple years to implement, which will require both scores to be delivered with each loan sold to the Enterprises.

Currently, the Enterprises only use Classic FICO, a model they have required for nearly 20 years. VantageScore 4.0 is a credit-scoring alternative jointly created by the nationwide consumer reporting agencies (CRAs). VantageScore and others have pushed for a change, arguing that it would allow more people to get approved for mortgages.

In 2018, Congress, through the Economic Growth, Regulatory Relief, and Consumer Protection Act, required the FHFA to establish standards and criteria for the Enterprises to adopt new credit scoring models. As we discussed here, some saw this as a specific push by Congress to allow the Enterprises to consider credit scoring alternatives, such as VantageScore. While the FHFA seemed initially hesitant to disrupt the status quo, it issued an Advanced Notice of Proposed Rulemaking, seeking comments on the proposed change. Trade groups like the American Bankers Association “commented extensively,” supporting the expansion of credit scores models to safely and reliably expand credit access.

FHFA Director Sandra Thompson believes the change will do just that. “Today’s decision will benefit borrowers and the Enterprises, along with maintaining safety and soundness. While implementing the newer credit score models is a significant change that will take time and require close coordination across the industry, the models bring improved accuracy and a more inclusive approach to evaluating borrowers.”

Once implemented, lenders will be required to deliver both FICO 10T and VantageScore 4.0 credit scores with each loan sold to the Enterprises. The VantageScore 4.0 and FICO 10T, the updated version of the classic FICO score, both incorporate information about borrowers’ rent payments, utility bills, and phone bills when those accounts are included in credit reports, rather than just information about bank loans and other financing. According to the FHFA, this additional information is likely to increase approvals for people with a more limited borrowing history.

The FHFA also announced that the Enterprises will work toward changing the requirement that lenders provide credit reports from all three CRAs to instead requiring credit reports from just two of the three.

As always, Troutman Pepper stands available to assist industry participants with this and other developments within the financial services landscape.