Mortgage financing giants Fannie Mae and Freddie Mac, which purchase most of the new loans for home purchases, is considering using VantageScore as an alternative to the long-established and dominant FICO credit scores.
Fannie and Freddie’s loosening of their grip on the FICO scoring model could enable borrowers unable to qualify for a mortgage overcome some hurdles in their current credit reports.
Supporters of VantageScore say its scores better predict creditworthiness for a larger range of borrowers, including minorities and first-time homebuyers, who may not have enough credit to get mortgages today.
These borrowers may also be penalized for a single negative event in their credit profile which may not be indicative of their overall creditworthiness, VantageScore says.
In August, Fannie Mae and Freddie Mac, which buy most of the new loans for home purchases, began to study the possibility of incorporating VantageScore, which claims to better predict credit worthiness than FICO.
Early last year, VantageScore, the second most widely used credit scoring model behind FICO, said it has updated its system to include up to 30 million “previously unscorable consumers.”
Not Penalized for Debts Paid or Settled
VantageScore says it can help consumers who default on loans as a result of a single or unique event, such as a natural disaster or sudden loss of income, by providing lenders with fuller and precise accounting to better reflect an individual’s fuller credit profile. If a consumer’s account goes into collections, for example, the consumer’s score will not be penalized if the debt was paid in full or settled.
Meanwhile, Fair Isaac Corp., the company behind FICO, followed VantageScore’s lead. Earlier this year, Fair Isaac Corp. also said it will stop including in its scoring model any record of a consumer failing to pay a bill, if the bill has been paid or settled with a collection agency.
Fair Isaac Corp. also said it will give less weight to unpaid medical bills that are with a collection agency.
FICO’s recalibration came after discussions with lenders and the Consumer Financial Protection Bureau meant to help expand lending without adding credit risk.
FICO: We Welcome Competition
FICO officials told Bloomberg that they welcome the competition from VantageScore. FICO’s rating system has been used by lenders since 1989.
“It keeps us on our toes,” Anthony Sprauve, FICO’s senior consumer credit specialist, told Bloomberg. “It’s good for the marketplace to have choices. The fact that 90 percent of lending decisions to be made in the U.S. use the FICO score is an indication that the marketplace still believes in the FICO score and is voting with its feet.”
VantageScore was founded in 2006 by the three big credit-reporting bureaus Equifax, Experian and TransUnion.
VantageScore reviews rent and utility payments, which FICO’s current model doesn’t, and monitors 24 months of consumer payment history. The two-year timetable allows VantageScore to improve the rating of consumers who borrow infrequently.