On August 16, the Federal Housing Finance Agency ("FHFA") issued a final rule on validation and approval of third-party credit score models ("Final Rule") that Fannie Mae and Freddie Mac ("GSEs") use in deciding whether to purchase residential mortgage loans.[1] The FHFA is the GSEs' prudential regulator and, since 2008, has served as their conservator. In doing so, the FHFA satisfied its obligation to publish a framework for credit score model validation and approval required in section 310 of the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 ("EGRRCPA").[2] Section 310 now requires each GSE to publish its description of its validation and approval process for evaluating applications from credit score model developers, consistent with the FHFA's framework.

The FHFA's framework is a four-phase process for the validation and approval of credit score models, and it specifies the criteria to be used and the timeframes for each phase. In the first and second phases, a GSE must publicly solicit submissions from credit score model developers and evaluate those submissions using established criteria. In the third phase, the GSE would evaluate a credit score model for accuracy, reliability, and integrity. In phase four, the GSE would evaluate the credit score model's potential impact on the GSE's own business and on the mortgage finance industry as a whole. The GSE must submit its proposal to approve or disapprove each submission to the FHFA for a final decision. 

Notably, the Final Rule reverses the proposed rule's requirement that a credit score model developer be independent of the owner of the data used to construct the model. When the FHFA issued the proposed rule, it noted that the three nationwide credit reporting agencies own both credit scoring company VantageScore LLC and the data needed to build credit score models.[3] The FHFA explained that the proposed independence requirement was intended to "avoid a possible negative impact on competition among credit score models, for example if pricing of credit scores and consumer credit reports were used to reduce competition and thereafter to increase prices."[4] 

Instead of the independence requirement, the Final Rule directs the GSEs to consider impacts on competition in the fourth stage of the FHFA's assessment framework. The Final Rule requires the GSEs to evaluate whether use of a particular credit score model will impact competition and whether the impact stems from the developer's affiliation with any other institution. The FHFA noted that the GSEs regularly evaluate impacts on competition when reviewing other third-party providers, such as servicers, sub-servicers and vendors.[5] 

Thus, VantageScore LLC is eligible to apply for consideration by the GSEs. The FHFA indicated that it expects Classic FICO, the score the GSEs have relied on for 12 years, to meet the criteria for approval "based on its history of use."[6] At the same time, the FHFA said that it expects the GSEs to submit other credit score models to it for approval, noting that "approving a credit score model in use for the past decade would not satisfy the intent of section 310 that the Enterprises consider credit score models developed after Classic FICO."[7]

[1] 84 FR 41866 (Aug. 10, 2019).

[2] Pub. L. 115-174.

[3] 83 FR 65575, 65579 (Dec. 21, 2018).

[4] Id.

[5] 84 FR at 41897

[6] Id. at 41888.

[7] Id.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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