Credit’s Cookin’

The Impact For Originators

Underwriters are the arbiters of borrowers’ credit histories, determining if they are eligible for financing, and if so, how much. However, LOs usually get the first peek at a potential client’s credit report, and therefore take the first stab at quoting them a rate. 

“I don’t think there’s anything they (LOs) can do to prepare because it is still going to be an automated underwriting process regulated by the GSEs, (Government-Sponsored Enterprises)” National Consumer Reporting Association (NCRA) Executive Director Terry Clemans said. “During the transition period, you’re going to be taking for the consumers a minimum of six scores and maybe nine scores to reduce to a single score and say yes, no, or how much. Figuring it out isn’t easy and if you miscalculate that the mistake is not cheap.”

The new system will change how credit is viewed by loan officers, incorporating up to two years of trended utilization rate data and offering more leniency toward tax liens, judgments, and medical collection debt. Concurrently, the Consumer Finance Protection Bureau (CFPB) is in the midst of a rulemaking process to remove medical bills from Americans’ credit reports.

While this is part of the FHFA’s plan to allow lenders to collect credit reports from just two of the national consumer reporting agencies instead of all three, some say the numbers don’t add up to an easy solution. 

“The two-score model is something that’s going to pose some operational challenges,” Xactus Chief Revenue Officer Greg Holmes told Mortgage Banker Magazine. 

Xactus provides credit verifications to more than 6,500 U.S. lenders. Since the “classic” version of FICO was programmed into automated underwriting engines more than 20 years ago, the Government-Sponsored Enterprises (GSEs) have yet to update the technology to reflect the new models.

“It’s not necessarily going to affect the process of how we deliver the files. We’re just going to be delivering an updated number,” Holmes said. The verifications company is in favor of making this improvement to ensure better accuracy of credit scores. “The general message that we’ve been delivered and how it’s going to affect the market is that higher scores will be higher and lower scores will be lower,” Holmes pointed out.

The biggest to-do for mortgage lenders, he added, will be learning how much scores are affected by changes made to specific line items in the files. “Lenders have become very smart in understanding how to work scores and they know that if this balance was lowered or this payment wasn’t there, they can get a pretty good idea of whether or not it’s going to have a positive impact on the score. Xactus is going to work very hard trying to give guidance on how the score moves and what moves the score the most.” While there is no set date for full use of the new system, lenders and the like are preparing themselves for incoming guidance from the GSEs. 

“Until we figure out how to operationalize it, how to digest it and understand the scores, it’s probably going to be a lingering date and a moving target,” Holmes said, adding that flexibility and patience will be key.

Growing Credit Costs

Xactus does not anticipate the new methodology will offer any relief in terms of the cost of pulling credit.

“Unfortunately – I don’t see it really helping from an expense standpoint – consumers,” Holmes said. “That’s probably the thing the market is hoping for, but I don’t see it happening.”

Furthermore, in Dec. 2023, FICO announced that it would end its tier-based pricing structure and charge the same, higher price for each score pulled in 2024. 

One of the misconceptions circulating is that this move will lead to cost savings to consumers, Holmes added. “The credit score itself costs more than the credit data, which is something that has really materialized as we move into 2024 pricing.”

In its role providing credit reports and verifications to lenders, Xactus is counting the different scores Loan Origination Systems (LOS) companies and API-integrated credit interfaces will have to swallow. One way or another, those costs are always passed to consumers.

“You’ve got two bureaus instead of three, but now you’ve got two scores instead of one. So if you do simple math, there’s one Equifax, there’s one Experian, one TransUnion, and then three scores. That’s six products in total. There’s going to be an education process for all lenders, and then there is simply the expectation of how it actually plays out through the process and how technology handles it,” Holmes said. “Those things are still unclear, but we will be on the front side of this and we will bring the most efficient manner for lenders to operate as scores get incorporated. We will definitely be a thought leader on understanding the scores – which is probably the most important thing – and that comes with education.”

The Trickiness Of Transitions 

Clemans expects full administration of the two new competing scores to be at least a year away, but it could take more time for lenders to become accustomed.

“They’re now in the process of being implemented into mortgage underwriting,” he said. The FHFA is working with the appropriate parties to ensure that programming changes are made to the operational technology. Xactus and other companies are working directly with the agency to understand how the changes will impact the market.

“We’re getting there,” Holmes said, encouraging LOs to prepare for more direction to come. “Just expect that the way you’re operating today will change. We’re going to learn together.”

While Clemans noted that the NCRA is generally supportive of updates to credit scoring, it has also put forward a plea that the agency chooses one instead of both models.

“There’s a lot of heavy lifting by the industry to implement these changes, including overcoming some obstacles that are going to be problematic at best…using both is problematic from a contractual and a statistical perspective.”

Using one of the models for a few years and reviewing its effectiveness, Clemans added, would encourage competition in the quality of the score level and pricing.

Every LOS still needs to be modified by resellers, and programming changes are forthcoming.

Clemans does not anticipate that the use of the new models will generate a major change in scores, though the system will be able to measure the creditworthiness of more consumers. 

“Based on anecdotal evidence and knowing the industry the last 30 years I don’t believe the assumption that scoring more people is automatically going to mean more loans,” he said. “The assumption is that the consumers who were unscorable are going to be eligible for loans, but now they will just get a poor score.”

One of the improvements cited in the new system is its ability to assess rent and utility data in credit files, but this data is often only visible for the small margin of consumers who have fallen delinquent on a number of bills. 

“Reporting negative data to the bureaus is one of the primary ways of the creditor to obtain payment – the vast majority do not report positive payment history,” Clemans pointed out. 

“So about 99% of the population will not see any benefit from that scoring model in that particular area. No score model can factor in data that doesn’t exist.”

Regardless, the NCRA is “very encouraging” of credit measurements being updated. In fact, the yardstick that is the classic model is worn and faded. 

“The mortgages being underwritten today are using a credit score that was based off of consumer spending habits prior to 2008 – that needs to change,” Clemans said. “For safety and soundness of the loans being underwritten and for fairness to the consumers who are applying for the loans, a more modern score model needs to be used.”