For many Americans, buying a home is a critical first step in building true generational wealth. Congress recognized this importance and ultimately created the GSEs to help expand homeownership in the United States. Despite this groundbreaking recognition, the Federal Housing Finance Agency (FHFA) is proposing significant changes to the mortgage financing process that would actually run counter to the GSE’s stated mission and could limit consumer access to affordable housing.
For more than three decades, the Tri-Bureau Credit Ecosystem has served as the industry standard, providing lenders with borrower credit report data from the three National Credit Reporting Agencies (NCRA). FHFA proposed moving to a two-way consolidated credit environment, ostensibly to lower costs for borrowers and spur innovation. The reality is that this shift may fail to achieve both goals.
While one might question the wisdom of proposing to reduce the amount of borrower credit report data available to lenders at a time when U.S. consumer debt has reached an all-time high of more than $17 trillion, the proposed requirements could create new challenges for borrowers. and the number of unintended (but foreseeable) negative consequences caused by lenders.
Borrower Impact
A study of VantageScore data across the entire bureau population showed that data discrepancies could result in a 20-point difference in the credit scores of more than 15% of consumers across the three bureaus. This is because many credit unions, community banks, collection agencies and other financial services providers report data to only a single bureau, resulting in important data elements potentially appearing on a credit report from only one bureau.
In addition, approximately 28 million adult consumers cannot be rated by any one credit bureau, and of those 28 million, another 12 million cannot be rated by a second credit bureau. Additionally, it is estimated that between 4.8 million and 7.5 million consumers can obtain a score from only one credit bureau. Of these consumers, 1.7 million to 2.8 million have near-prime or better credit scores, so a dual-consolidation credit reporting strategy could result in these consumers being either denied a loan for which they qualify or being offered a higher Expensive financing options
This end result is directly contrary to the GSE’s stated mission, because incomplete information about borrowers’ creditworthiness used in lending decisions has the potential to result in as many as 2.8 million borrowers being improperly denied credit.
For borrowers who were not denied credit but were forced to use more expensive financing options due to missing data, this could result in loan-level pricing adjustment (LLPA) costs that could increase by up to $3,000 for some borrowers.
Impact on Lenders and Investors
In addition to the impact on borrowers, changes in the dual-merger ecosystem will also create additional risks and costs for lenders, secondary market investors, and government-backed enterprises.
The emergence of new financial services products on the market, such as buy now, pay later (BNPL), and the fact that some fintech consumer lenders are not uniformly providing data to all three NCRAs are creating serious data blind spots for mortgage lenders. Therefore, using two (instead of three) credit reports may overlook other important trade information about a potential borrower.
To illustrate the scope of the problem, Equifax analyzed fintech unsecured installment loans in its database and found that the total number of fintech unsecured installment loans increased by 3.1 million from January 2021 to January 2023 (a 48% increase) , equivalent to an increase in total balances of more than $26 billion (a 44% increase).
Infrequent or inconsistent reporting of transactions to all three NCRAs, such as BNPL or fintech lending, can obfuscate the complete picture for lenders, including additional consumer debt obligations, and in some cases can lead to delinquencies because lenders cannot Knowing a borrower’s full debt obligations, an inaccurate risk assessment is more likely to result in the borrower entering a higher credit score range and create unforeseen risks in the lender’s portfolio.
More data, not less, creates more opportunities for borrowers
The mortgage industry is united in our commitment to helping more Americans obtain mortgage financing responsibly. While the FHFA’s efforts to lower costs for consumers are well-intentioned, upon proper review, its dual-consolidation credit reporting proposal simply falls short of its intended goals. In many cases, because lenders use two credit reports instead of three, any minimal savings a borrower may receive during the origination process are offset by potential savings the borrower may miss over the lifetime of the loan. Better interest rates and terms. In today’s complex consumer debt environment, the focus should be on obtaining more, not less, actionable data to help inform lending decisions.
