FHFA Proposal Expresses Concerns with Key Credit Score Alternative

If a recent proposal is any indication, the Federal Housing Finance Agency (“FHFA”) may feel more comfortable with the status quo than with permitting Fannie Mae and Freddie Mac (“the Enterprises”) to explore the benefits of using VantageScore 3.0, a credit-scoring alternative jointly created by the nationwide consumer reporting agencies, or “CRAs.”

Last month, the FHFA announced a proposal that establishes standards and criteria for the Enterprises to adopt new credit-scoring models. This proposal satisfies a requirement embedded in Congress’s recent Economic Growth, Regulatory Relief, and Consumer Protection Act requiring the FHFA to establish such standards. For some observers, this was a specific push by Congress to allow the Enterprises to consider credit-scoring alternatives such as VantageScore 3.0.

On its face, the FHFA’s proposed rule creates a straightforward, four-step process by which the Enterprises can evaluate and adopt alternative credit-scoring models. Further within the proposal, however, the FHFA proposes to “prohibit an Enterprise from approving any credit score model developed by a company that is related to a consumer data provider through any common ownership or control, of any type or amount.” The proposal would also require the Enterprises to evaluate “potential conflicts of interest and competitive effects” of a potential credit-scoring model. To support these positions, the FHFA expressly discussed the relationship between the owner of VantageScore 3.0 and the CRAs. It further expressed its concern that a credit-scoring model with vertical integration with a CRA could offer its services “more cheaply.”

Despite the stated prohibition against the Enterprises’ use of a credit-scoring model with ownership ties to a consumer data provider, the proposal could still be amended as the FHFA considers the feedback it receives from industry participants during the comment period. Additionally, a recent change in the director of the FHFA may further impact the final rule. Industry participants who desire to see amendments to the proposal should consider submitting comments to the FHFA prior to the comment period closing on March 21, 2019. As always, Troutman Sanders stands available to assist industry participants with this and other developments within the financial services landscape.