Federal Housing Finance Agency (FHFA) Director Bill Pulte announced that Fannie Mae and Freddie Mac will permit lenders to continue to use a credit scoring model based on the “tri-merge” method of accounting for consumer credit reports provided by the nation’s three credit reporting agencies.
“Effective today, to increase competition to the Credit Score Ecosystem and consistent with President Trump’s landslide mandate to lower costs, Fannie and Freddie will ALLOW lenders to use Vantage 4.0 Score with no current requirement to build new infrastructure (stays Tri Merge),” Pulte wrote in a social media post on X (formerly Twitter) He also has touted the fact that rental payments will be considered in consumer credit scores.
The announcement represents a reversal of the FHFA’s November 2022 announcement that it would be shifting to a bi-merge credit reporting model, which would require lenders to incorporate credit reports from only two of the three major credit reporting bureaus – Experian, Equifax and Transunion. However, the bi-merge requirement was not included in a 2023 final rule updating the credit scoring framework for the government-sponsored enterprises (GSEs).
When using the tri-merge scoring model, lenders traditionally use the middle score to determine mortgage eligibility and interest rates. With the bi-merge model, lenders generally indicated they would use the lower of the two scores as the borrower’s representative score.
Many institutions in the financial services industry had been planning on updating their infrastructure in preparation for a transition to a bi-merge scoring model prior to Pulte’s announcement.
The July 8 announcement was a major blow to VantageScore’s largest competitor, Fair Isaac Corp. (FICO), as it effectively ended FICO’s long-standing exclusivity in government-backed mortgage underwriting and sent shares of company’s stock tumbling 15 percent the same day.
America’s Credit Unions (ACU) welcomed the news, highlighting the benefits of not forcing financial institutions to update their credit scoring infrastructures.
“Today’s announcement is welcome flexibility for credit unions and the members they serve,” ACU Chief Advocacy Officer Carrie Hunt said in a press release. “By keeping the tri-merge credit report and allowing — but not requiring — the use of VantageScore 4.0, FHFA has helped avoid costly system overhauls while opening the door to more inclusive credit access. This thoughtful step reduces near-term compliance burdens, preserves vendor competition, and creates new opportunities to responsibly serve communities whose credit scores may skew lower. We’ll continue working with FHFA to ensure that any future credit score changes support fairness, innovation, and the operational realities of community-based lenders.”
The ACU said the shift will result in lower near-term compliance costs, better pricing leverage when negotiating with credit report vendors, FICO and VantageScore, and policy and risk management considerations.
“If a credit union chooses to adopt VantageScore, it will have to revise its underwriting guidelines, risk-based pricing curves, fair-lending analysis, and secondary-market representations to account for the different score distribution,” the ACU release stated.
VantageScore Chief Strategy Officer and Chief Economist Rikard Bandebo said during this year’s Consumer Bankers Association’s conference the new scoring model was designed to account for the “new normal” in credit scoring.
“The consumer lending space is not what it used to be,” Bandebo said. “We will never return to a pre-pandemic or a pandemic environment. We have to be moving toward the future of lending. We’ve been listening to our customers – regulators, industry experts, lenders – and they’ve been telling us there is a need for a new credit risk model to account for this ‘new normal’ that the consumer lending space is in, and we listened.”
Both VantageScore 4.0 and VantageScore 5.0 are compatible with either a bi-merge or tri-merge credit scoring requirement.