Fannie Mae and Freddie Mac Adopt Alternative Credit Scores
February 8, 2024
Fannie Mae and Freddie Mac Adopt Alternative Credit Scores
Fannie Mae and Freddie Mac, government-sponsored
comprehensive histories showing consistent payment
enterprises that collectively guarantee the default risks for a
patterns over time.
large share of U.S. single-family mortgages, are adopting
scoring metrics that incorporate available rent, utilities, and
Rent Reporting Developments
telecom bill payment data when assessing the default risks
Before alternative credit scores are computed, rent payment
of mortgage applicants. This In Focus reviews the
histories must first be collected and digitized. Before the
motivation for and some issues pertaining to this transition.
2000s, rent was largely paid either via cash or check rather
than electronically. Renters could request and retain dated
Background: Traditional versus
receipts from landlords for payment verification. For
Alternative Credit Scores
tenants who paid their rents via check, their (paper) bank
A consumer credit score is a numeric metric used by
statements could serve as official verification. Although
lenders to determine the likelihood of default on a
loan applicants could turn over receipts and bank statements
consumer loan. Consumer scores are computed using
for review by lenders, papers can get lost, be damaged, and
information obtained from one or more consumer reports.
take time to be reproduced. Over the past two decades,
Such information, collected by nationwide credit reporting
however, more rents are being paid by electronic means
agencies, includes consumers’ credit repayment history, the
(e.g., debit or credit cards, rent payment apps), thus
amount of outstanding debts relative to credit limits, the
enhancing the ability to collect and report these data for
length of credit history, and the frequency of new credit
generating alternative credit scores.
requests. From these data, consumer credit scores can be
generated, representing the likelihood that prospective
Although rent reporting is not yet widespread, recent trends
borrowers will repay their loans in a timely manner.
indicate that it may expand. Rental payment data has
Borrowers with higher credit scores are considered more
largely been reported by property management companies
creditworthy, meaning that they are less likely to default on
or landlords of multifamily properties (e.g., those with at
their loan obligations. Credit scores, therefore, influence
least five or more residential units)—particularly large
consumers’ credit access and loan terms.
apartment complexes. Property managers that screen
numerous tenant applicants over the course of a year are
The Consumer Financial Protection Bureau (CFPB),
more likely to find a database of rent payment behavior
however, used data from December 2010 to estimate that
patterns useful. Moreover, the per unit costs of financial
approximately 11% of the U.S. adult population was credit
reporting decreases with the volume of reporting.
invisible, meaning that they had no credit tradelines (i.e.,
Consequently, property management companies (relative to
credit bureau records) at any of the three largest credit
small landlords) are more likely to participate in the
bureaus (i.e., Experian, Equifax, and TransUnion). The
reporting of rental payment information, thus supporting the
CFPB also estimated that an additional 8.3% were
growth of the rent reporting industry.
nonscorable, meaning they had thin (e.g., short or outdated)
credit histories that cannot be used to compute accurate
Some states and localities are experimenting with rent
credit scores. Hence, updating conventional scoring metrics
reporting for landlords, primarily focusing on residents
with additional non-credit repayment tradelines may
receiving housing assistance or with low incomes. For
enhance credit access.
example, these pilot programs often require landlords
receiving local, state, or federal housing subsidies to offer
Specifically, alternative credit scores are consumer metrics
to their tenants the option to have their rental payments
that incorporate information not generally incorporated into
reported. Under these pilots, state housing authorities are
traditional credit scores, such as recurrent non-credit
also required to offer rent payment reporting options to
payments for rent and utilities. (See CRS In Focus IF11630,
tenants who either reside in properties under their
Alternative Data in Financial Services, by Cheryl R.
administration or receive state housing vouchers.
Cooper.) The more comprehensive payment history may
enhance the predictability of consumer metrics. For
Fannie Mae and Freddie Mac, collectively known as the
example, individuals without rent tradelines can still have
Enterprises, provide liquidity to U.S. single-family and
rent debts in collection reported to credit bureaus by third-
multifamily mortgage markets. The Enterprises have
party debt collectors. (For more information, see CRS
encouraged their borrowers of multifamily loans (e.g.,
Report R46477, The Debt Collection Market and Selected
owners of apartment buildings) to report timely rent
Policy Issues, by Cheryl R. Cooper.) In these cases,
payment data of tenants to a vendor that subsequently
determining repayment risk based upon isolated negative
forwards the information to credit bureaus. Fannie Mae
incidents may not be as accurate as using more
offers to pay one year of fees directly to the vendor. Freddie
https://crsreports.congress.gov
Fannie Mae and Freddie Mac Adopt Alternative Credit Scores
Mac provides closing cost credits to its multifamily
both credit risk, the risk of borrowers repaying late or not at
borrowers that participate in rent reporting.
all, and prepayment risk, the risk borrowers will repay their
mortgages ahead of schedule. (Higher credit scores
Many landlords do not report rent data because they are not
typically indicate both lower credit risk and higher
covered by any legal mandates, have not obtained financing
prepayment risk.) Because investors in MBSs issued by the
from the Enterprises, or choose not to incur costs to
Enterprises face exposure only to prepayment risk, the
transmit data. Consequently, tenants can sign up directly
disclosure of one fewer credit score may simplify the ability
with vendors and pay for reporting services. Some vendors’
to estimate when an MBS might generate less cash flow due
platforms may allow tenants—after creating their online
to early mortgage repayments. Less complexity for
payment accounts—to send automatic reminders or rent
investors aligns with FHFA’s initiative to minimize pricing
payment transfers, further reducing the probability of being
differentials between the Enterprises’ MBS issuances,
delinquent. Some tenants may be able to lower the fees for
discussed in CRS Report R46746, Fannie Mae and Freddie
this service by selecting vendors that report to only one
Mac: Recent Administrative Developments, by Darryl E.
rather than to multiple credit bureaus. Some vendors may
Getter.
be able to subsidize these costs for low-income tenants by
using revenues generated by higher-income tenants as well
The transition from tri-merge to bi-merge still poses a risk
as by appealing to landlords to participate on their
of information loss. Individual credit reporting agencies
platforms.
(CRAs) have their own policies for storing and reporting
information. For example, one CRA may report delinquent
Despite recent developments, the volume of rent reporting
debt obligations separately from the penalties and fees;
is still considered low. In a November 2022 report, the
another CRA may combine both items into one entry.
CFPB estimates that 1.7%-2.3% of adults living in rental
Consequently, when creating credit scores, firms that
housing are likely to have their rent payments reported to
purchase consumer information from different CRAs may
credit bureaus. Thus, many updated credit scores are still
acquire similar but different information. Furthermore,
unlikely to include this information due to lack of
individual scoring firms have their own proprietary
availability.
statistical models, decide what consumer information
should be included and excluded from calculations, and
Enterprises’ Updates to Credit Scores
choose whether to equally weight or place heavier weights
Section 310 of P.L. 115-174, enacted in 2018, establishes
on information more recent or deemed more pertinent—
requirements for the Enterprises’ use of third-party credit
perhaps as instructed by the requestor of the scores. To the
scores. On October 24, 2022, the Federal Housing Finance
extent using more data sources can be more informative,
Agency (FHFA), their primary regulator and current
then transitioning from tri-merge to bi-merge may result in
conservator, approved the inclusion of two credit scores—
some loss of information that could arguably benefit
FICO 10T and VantageScore 4.0—for all Enterprises’
invisible and nonscorable consumers.
single-family mortgage purchases. This transition is
expected to be completed by the fourth quarter of 2025.
Continuing Underwriting Challenges
Credit scores are only part of the overall underwriting
Both FICO 10T and VantageScore 4.0 incorporate
process. Underwriting—the process of assessing the
traditional credit repayment data as well as alternative data
creditworthiness of prospective borrowers—is typically
such as rent, utilities, and telecom repayment data. The
more expensive and time-consuming for those who lack
updated credit scores are considered more accurate because
sufficient credit histories, face greater income variability, or
they incorporate trends in consumer debt accumulation and
lack collateral sufficient for backing loans. Incorporation of
repayment behaviors—in addition to changes and
alternative credit scores may still not increase credit access
averages—over a 24-month period (as opposed to a
for these groups. For example, some people may still lack
snapshot at a single point in time, typically on the day a
digital non-credit payment histories if they are paid in cash,
loan applicant would apply for a mortgage). The scores,
engage primarily in cash transactions, or choose not to have
however, have some differences. For example, the
bank or credit union checking accounts. Furthermore, the
numerical ranges used for interpreting credit scores differ
inclusion of rent and utility tradelines may enhance
for the two metrics. The firms also apply different weights
accessibility to and lower the costs of consumer credit (e.g.,
to the different categories (e.g., payment history, credit
credit cards, automobile loans) for some invisible and
utilization) that comprise their credit scores. The FHFA
nonscorable individuals, but it may not significantly
director, however, testified that various performance tests
increase the share of creditworthy mortgage applicants due
revealed minimal differences between the two credit scores,
to other requirements. Some individuals may still lack the
and they both exhibit acceptable levels of accuracy.
Enterprises’ minimum tradeline requirements, currently
either three credit or four non-credit tradelines of recurring
Tri-Merge versus Bi-Merge
or fully repaid obligations. (Various federal agencies that
The Enterprises will switch from a tri-merge system, in
provide mortgage guarantees generally require at least two
which mortgage originators were sending three scores with
tradelines that can be credit, non-credit, or a combination.)
every mortgage delivery, to a bi-merge system, sending
For this reason, the mortgage industry (particularly small
only FICO 10T and Vantage Score 4 scores. For investors
loan originators)—which is incurring fixed costs to ensure
in the mortgage-backed securities (MBS) markets issued by
that mortgage originations comply with the Enterprises’
the Enterprises, the bi-merge system may improve
updated credit score requirements—is somewhat skeptical
transparency. Specifically, credit scores are informative of
of the benefit in terms of the total return on investment.
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Fannie Mae and Freddie Mac Adopt Alternative Credit Scores
IF12588
Darryl E. Getter, Specialist in Financial Economics
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