Enterprise Credit Score and Credit Reports Initiative Update

A lot of questions have been circulating through the industry around the proposed changes to Credit Score Models that were announced by the Federal Housing Finance Agency (FHFA) in October 2022. In March, Fannie Mae created a “Partner Playbook” that covers a lot of detail regarding the upcoming changes. The Playbook was just revised in May 2023, and they will continue to do quarterly updates. While the goals of the initiative will not change, the timeline and some of the details surrounding it will most likely change each quarter. For the time being, here are some basic points covered in the Playbook:

This initiative will happen in two phases:
1. Moving from the current “tri-merge” credit report to a “bi-merge” credit report. This first phase is set to begin Q1 2024 using the Classic FICO models.
2. Moving from the Classic FICO models to two scores generated by FICO score 10T and Vantage Score 4.0. This phase is targeted to begin Q4 2025.

The complete proposed timeline is as follows:
• 2nd Quarter 2023 – FHFA will gather industry feedback regarding the changes.
• 3rd Quarter 2023 – They will publish Uniform Loan Delivery Dataset (ULDD) specifications to support the updates.
• 4th Quarter 2023 – Publish Classic FICO historical data to support change in credit score calculation (“tr-merge” to “bi-merge”)
• 1st Quarter 2024 – Implement credit report requirements for updating from a “tri-merge” to a “bi-merge” (Using Classic FICO scores)
• 3rd Quarter – 2024 – Lenders to deliver and disclose FICO Score 10T and Vantage Score 4.0 credit scores in addition to Classic FICO scores.
• 1st Quarter 2025 – Publish FICO Score 10T and Vantage Score 4.0 historical data to support credit score model updates.
• 4th Quarter 2025 – Incorporate credit score models into the mortgage processes.

The two most important dates to recognize here are moving to the “bi-merge” report which is set to begin in Q1 2024 and then moving to the two newer scoring models in Q4 2025. Until the move is made to FICO 10T and Vantage Score 4.0 the Classic Models will be the ones used in the “bi-merge” report. It is also important to note that there will be a period of time during Q3 2024 when Classic FICO scores, FICO 10T, and Vantage 04 will all be used.

This is where we run into a lot of questions. With the “tri-merge” report that we have today, the mid score is used as the representative credit score. With a “bi-merge” there is no middle score, so the question becomes, how does that work? With a “bi-merge” report with two borrowers using the Classic FICO models the “Average/then lower” score would be used. Fannie Mae/Freddie Mac have provided several examples of this in their “playbook.” Using that scenario let’s say the borrower has two scores of 740 and 745 and the co-borrower has two scores of 775 and 780. The average score for each borrower would be 743 and 778 respectively. Using the “average/then lower” calculations the lower average score would be the one that is used, which would be 743.

Once the new models are incorporated, however, that would change. At that point, the model uses what they are calling an “Average/Then Average” approach for the scores. Using this same scenario and the “Average/then Average” approach, the mid would then be 760. Is all this a little confusing? Yes… What this basically means is that once the “Bi-merge” is adopted they will be using the lower of the average scores for a joint file. With the new models they will be using the average of the scores of both borrowers. While this proposed way may benefit some borrowers it could also be a detriment to others, especially if one borrower has high scores and the other does not. With the first scenario the lower of the average score would be used, so for certain borrowers, this could be detrimental. Right now, this is just a proposal and is subject to change.

Other pressing questions that have been brought up are whether a lender can pull a three-bureau report and then choose the two bureaus they want to use. The answer is no. If a three-bureau report is pulled, then all three bureaus must be delivered. Another question is whether lenders will be able to choose the two bureaus they want to pull or will this be dictated by the Enterprises (Fannie Mae and Freddie Mac). As of their last update the lender will be able to pick which two bureaus they want to use. They just can’t pull from all three bureaus and pick and choose which two scores to use. Keep in mind this is for phase one where the Classic FICO scores will still be used. Once Phase two is fully implemented they will be using only FICO 10T and Vantage Score 04. Once phase two has been completely validated and fully implemented the FICO Classic models will be retired completely. This will most likely not happen until late in 2026.

It is important to remember that right now this is a moving target and subject to change at any time depending on their findings from surveys and their data research. There are still and will continue to be a lot of questions regarding these changes. Right now, a lot of which are unanswered. You can check quarterly for updates to the “Playbook” by going to: https://singlefamily.fanniemae.com/media/34286/display. We will also keep you updated on the changes occurring.