A bipartisan group of lawmakers urged the Federal Housing Finance Agency last week to revise seller/servicer guidelines to ensure competition among credit score providers in mortgage lending.
Reps. Spencer Bachus (R-Ala.), Jim Himes (D-Conn.), Carolyn Maloney (D-N.Y.) and Ed Royce (R-Calif.) said updating seller/servicer guidelines to eliminate requiring underwriting with a credit score provided by the Fair Isaac Corporation is in the best interest of Fannie Mae and Freddie Mac, as well as consumers and taxpayers.
“They do not permit lenders to use credit scores from any other providers,” the lawmakers said in the Jan. 9 letter. “Because the GSEs backed 77 percent of new mortgages last year, this requirement creates a significant barrier to entry to the mortgage market for other credit score providers. Moreover, the requirement risks harming consumers by stifling innovation, increasing prices and reducing the predictiveness of credit scores.”
The legislators said the consequences of the FICO requirement will be magnified with the implementation of credit risk retention and ability-to-repay rules under Dodd-Frank.
“Under those rules important definitions depend on a mortgage being eligible for purchase by the GSEs,” the letter reads. “By implication, this pulls in the seller/servicer guidelines and their FICO requirement.”
Financial regulators have sought to align the definition of a qualified residential mortgage under the credit risk retention rule—which requires financial institutions to hold a portion of mortgage origination risk—with the definition of “qualified mortgage” under the CFPB’s ability-to-repay rule.
QMs are presumed to meet ability-to-repay requirements and are purchasable by Fannie Mae and Freddie Mac. The lawmakers said that linking the QRM definition to the QM definition risks “creating a strong bias for mortgages to be underwritten using a FICO score so that they are eligible for purchase by the GSEs.”
“In doing so, they would unwittingly solidify the barrier to entry in the mortgage market for new credit score providers created by the current seller/servicer guidelines,” the letter reads. “We believe that a revision of the seller/servicer guidelines should permit the use of credit scores from more than one provider… Such action would not only remove an unfair barrier to entry in the mortgage market but also would encourage the development of more predictive credit scores… improve the ability of the GSEs to manage credit risk… [and] reduce potential operational risk to the GSEs.”