Research from TransUnion suggests that the Federal Housing Finance Agency’s (FHFA) move to a bi-merge system could significantly impact both consumers and lenders while providing little to no positive benefits.

TransUnion SVP and mortgage business leader Joe Mellman said that when lenders use data from three credit bureaus, it provides a more complete and, in many cases, accurate picture of their credit risk. While much activity gets reported to all three bureaus, plenty does not (he also noted reporting is voluntary). Smaller regional lenders might report to only one or two.

The advent of fintech widens that disparity.

“That has increased data variation to the bureaus,” Mellman said. “Often, when fintechs get started in the industry, they will start with one bureau, and only that bureau will get data from that fintech. Then, as the fintech scales and matures, they may expand that reporting to all three. But that’s there’s a timeline and evolution to that.”

At least the FHFA had good intentions…

Mellman understands the motivation to make changes. The FHFA wants to see scores upgraded. They also want to save consumers money. Pulling data costs between $10 and $20. FICO and VantageScore models were developed 20 years ago, so some change was needed. 

The FHFA doesn’t realize that they’re introducing a lot of change in their quest to save consumers less than one-fifth of one per cent of the cost of their mortgage origination. It begins with adding complexity. Mellman explained that other loans, such as GSE and USDA, still have the tri-merge requirement. Lenders must contend with multiple approaches and additional regulatory and compliance measures.

Fair lending issues

The shift clashes with the many fair-lending measures. If two identical consumers apply for a mortgage and one’s creditworthiness is assessed with data from three bureaus and the other on data from two, one could get approved and the other denied. 

It also opens the possibility that consumers can shop around for lenders who only use credit scores from agencies where their best data is housed. The reverse is also true. Lenders with access to data that others don’t may have an advantage if they see added positive (or negative) reporting activity before the competition.

“Are there fair lending implications or other complex legal and regulatory considerations that haven’t been figured out yet?” Mellman asked. “All these things plus the technical limitation usually end up adding cost to the system rather than taking it out.”

Who’s affected most by the bi-merge? You won’t be surprised

Mellman added that these changes disproportionately affect those folks with lower credit scores. Those with credit scores at 620, the edge of GSE mortgage qualification, are often Black, Hispanic, first-time homebuyers and of low to moderate income. They are 50% overrepresented. 

“Those with an established consumer presence, say around 820, if they lose 20 to 40 points, there’s no big impact,” Mellman said. “A 40-point swing can make all the difference in the world. It means the difference between qualifying and not qualifying, and your interest rate could be higher or lower, depending on the information used.”

Data variations increase with lower scores, too. Mellman said the average difference between a high and low score in the 800 range is about 20 points. That shoots up to 45 for scores near the 620 GSE cutoff. TransUnion also estimates that 600,000 new mortgage borrowers per year could pay more in interest under a bi-merge system.

Shades of 2008

The report mentions this has similar undertones to the 2008 financial crisis. Questionable data was often ignored, which increased risk, which was also ignored. Today, that could see 200,000 people receive mortgages under a bi-merge system that they would not qualify for under a tri-merge.

“For us, accuracy is the most important thing,” Mellman said. “It’s not doing a consumer any favors by putting them into a product that they’re unable to maintain if there’s a downturn or just economic stress.”

Worries for lenders and investors

Lenders are concerned about the legal and regulatory risks of treating consumers differently due to employing different data sets. Those who follow the rules worry about losing out to those gaming the system. They also have to ingest plenty of information and new processes quickly. Mellman said they need time to get comfortable with new processes.

Investors are also affected. Their desired returns are based on accurate risk assessments. It leaves a gap if positive or negative data is ignored and risk assessments are not correctly adjusted. Investors could demand higher premiums for added risk. Consumers could see higher borrowing costs.

TransUnion recommendations

The FHFA has postponed but not cancelled the bi-merge implementation. TransUnion recommends they distribute implementation rules and legal guidelines addressing the treatment of reverse action codes and fair lending implications. Meet with industry, consumer groups and government while sharing more thorough and transparent analyses. 

Allow industry data to be independently analyzed for possible impacts, and allow sufficient time for stakeholder responses.

Plenty of work must be done before the FHFA realizes its goal of helping consumers.

“It seems that it’s not going to be a good thing for consumers,” Mellman said. “We’d encourage the FHFA to consider alternatives to the bi-merge to maintain their mission of expanding safe and affordable housing. Because we don’t think that moving from tri-merge to bi-merge is necessarily consistent with that mission.”

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