Lenders Could Start Using Different Credit Scores to Issue Mortgages
As a recent article published in The Wall Street Journal outlines, "banks and rival lenders are butting heads over the credit scores used to decide millions of mortgage requests by U.S. home buyers." This has pushed the Federal Housing Finance Agency (FHFA) to consider whether to permit nonbank lenders to utilize options other than the widely used FICO scores, generated by the Fair Isaac Corp., to approve borrowers for mortgage loans.
While most banks argue that using scores generated by VantageScore Solutions LLC (including Experian, Equifax, and Transunion) "could lead to an increase in consumers with riskier credit profiles getting mortgages and a subsequent rise in defaults," nonbank lenders say the conservative FICO system "shuts out [otherwise qualified] borrowers who don't use credit either out of personal choice or because they went through a bankruptcy or foreclosure."
As Sanjiv Das, CEO of Caliber Home Loans tells WSJ, nonbank lenders are seeking new requirements not to increase the number of risky loans, but to create a space for deserving borrowers to qualify for a loan. "VantageScore could open up homeownership to customers including millennials who don't have a credit history because of their age," he said.
The FHFA has a number of options to consider in the debate, three of which have the highest likely outcome:
- Require lenders to check credit scores from either FICO or VantageScore.
- Require lenders to check credit scores from both FICO and VantageScore.
- Allow lenders to choose which of the two credit scores they will obtain.