Last week news came out that the FHFA, which oversees Fannie Mae and Freddie Mac, will now allow lenders to use Vantage 4.0 score. Initially, this is a “big deal,” but it is very important for lenders and vendors to understand what this means and what happens next.
VantageScore is a company that is owned by the three credit bureaus (TransUnion, Experian, and Equifax) and offers credit scores. Lenders who offer mortgages with the intention of selling them to Fannie or Freddie now have the option to use either VantageScore or to continue to use FICO, a competitor, to assess a borrower. This competition in the credit score space could reduce consumer costs, IF implemented correctly.
But some consumer advocates believe the introduction of VantageScore into the mortgage space will actually decrease competition by consolidating industry share more firmly in the hands of the three credit bureaus, which own VantageScore. If you want a mortgage, you have to pull all three reports. You have no choice. The three created VantageScore to try to drive FICO out of the market because they want the whole market. FICO is the only independent actor. The thinking is that loan officers will pull, and pay for, as many sources of credit information that will help their borrowers, which actually may drive up the cost to lenders
Proponents say that the VantageScore model (the information it compiles on consumers to offer lenders information on their creditworthiness) is “more holistic” than FICO’s and is able to blend consumer information over a period of time. This “trended” approach is more useful than just looking at a consumer at one moment in time because it can show whether that person's financial health is improving or weakening.
Fair Isaac has said that it welcomes competition on a level playing field among credit score providers… FICO scores are the industry standard and preferred choice for evaluating creditworthiness in the mortgage process, regardless of whether the loan is conforming or non-conforming.
In general, a modernized credit score may lead to a more efficient, more transparent, and more competitive credit scoring system that serves as many creditworthy Americans as possible. But the transition to using a new model raises a number of implementation questions and concerns that the GSEs will need to address before they can take delivery of loans that rely on new scores (including Vantage Score 4.0 and/or FICO 10T) for pricing or eligibility. Credit score standards are embedded throughout the mortgage ecosystem and the incorporation of Vantage into that ecosystem will require the GSEs to provide lenders, investors, and other market participants critical implementation guidance.
In other words, it is fine to make an announcement that something is effective immediately. Changing the way Freddie and Fannie and others actually roll that out will take time. How much time? No one knows.