The Federal Housing Finance Agency, on Monday, the 24th of October, announced its plans to replace the classic FICO credit model with the FICO 10T and VantageScore 4.0. Fannie Mae and Freddie Mac have used the Classic FICO credit model for about 20 years as a model for making important lending decisions.
In a statement by the FHFA Director, Sandra Thompson, at the Mortgage Bankers Association (MBA) Annual Conference in Nashville, she said these new credit models would deliver more accurate credit scores, and there is the belief that the industry, including investors, would benefit from not one but two different credit score models. She added that the new models are more inclusive as there is more consideration for new payment records for borrowers in determining their credit scores.
Although the FICO 10T and VantageScore 4.0 have been launched, the agency will still conduct more outreaches in the coming months to make room for a smooth transition from the existing model. As such, the complete transition will take sufficient time and effort from all stakeholders. Once fully implemented, lenders must provide FICO 10T and VantageScore 4.0 to Fannie Mae and Freddie Mac for every loan sold.
In addition, the agency has also announced a change in the credit report requirement for lenders from a tri-merge to a bi-merge. This means lenders will now have to make available credit reports from two of the three CRAs nationwide. These changes are expected to reduce lenders’ costs and encourage industry innovation. To read more, click here.