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49 » VISIT US ONLINE @ DSNEWS.COM CREDIT SCORE COMPETITION ACT REINTRODUCED U.S. Reps. Ed Royce (R-California), Kyrsten Sinema (D-Arizona), and Terri Sewell (D-Alabama) reintroduced the Credit Score Competition Act, a bill that forces Fannie Mae and Freddie Mac to consider alternative credit scoring models when approving mortgage loans. e representatives argue that Fannie Mae and Freddie Mac dominate the secondary mortgage industry and their reliance on FICO equates to a monopoly of the market. In their statement, they say FICO doesn't consider on-time rent and utility payments. Alternative scoring models are more likely to take these things into consideration and raise the chances of an applicant to be approved for a mortgage. Rep. Sinema said, "Fannie Mae and Freddie Mac should have the ability to look beyond traditional forms of credit . . ." Joanne Gaskin, Senior Director of Scores & Analytics at FICO, gave a FICO perspective on the bill when it was initially introduced in an exclusive interview with DS News. Gaskin said, "In fact, the GSEs developed their own credit model to make the purchase decisions. e interesting thing is if we look outside of the mortgage space, the most widely used scoring model in the marketplace is FICO Score 8, which is not in use by the GSEs. So the GSEs' selection of a score does not create a monopoly." Even if the bill doesn't move forward, Gaskin said that FICO is introducing a new scoring model called FICO Score XD. FICO XD scores are derived from how customers pay utility, cell phone, and cable bills and are being offered to bank credit card issuers to give unscorable consumers a chance. is scoring targets the "credit invisible," about 50 million people who have no information in the three main credit repositories. "We have gone out and looked for compliant datasets that come from both Equifax and Lexis Nexis to create a score that will open a pathway to credit for those that are credit invisible today," Gaskin said. "is is a much better approach than just relaxing minimum credit score criteria and using stale data at the credit repositories to score more consumers." RISKY BUSINESS? NEW LOAN MODS REDEFAULT AT HIGHER RATES Analysts at Fitch Ratings have found that loans modified after 2014 have higher redefault rates. e data was published as part of the company's Historical Modification Data Review, which analyzed Fannie Mae's dataset for modified single-family mortgages. e dataset contained 700,000 loans and a $135 billion balance. Of these, 448,000 loans were still active with an outstanding balance of $75 billion. Based on the data being collected since 2009, there is a strong tie between new loan modification and higher redefault rates. Analysts found that loans modified after 2014 have higher redefault rates, with 2015 being the highest since 2010. e report cites weak credit attributes as a possible cause for the spike since the average FICO score was only 592. ese loans redefaulted quickly after modification—75 percent of them within the first two years alone. Traditionally, loan-to-value ratios and credit scores are risk predictors, but the report stated that "loan modification terms play a significant role, and there is direct correlation between the amount of the payment reduction and redefault rates. Borrowers who received multiple modifications have higher redefault rates." Most of the loans included in the report were modified per one of the following three programs: Home Affordable Modification Program (HAMP), Streamlined Modification Program (SMP), and Standard Modification. Unlike HAMP and Standard Modification, which use step-up mortgages and require documented hardship, SMP doesn't require the borrower to have a documented hardship and focuses on fixed-rate modifications. Although SMP loans comprised much of the outstanding balance in the dataset ($35 billion, or 47 percent of the overall balance), the highest redefault rate is found in Standard Modification loans. ese borrowers typically don't qualify for HAMP or have defaulted on HAMP before. Fannie Mae plans to replace Standard Modification in late 2017 with the Fannie Mae Flex Modification Program. HAMP loans had the lowest redefault rate out of all three programs. e analysts predicted that the trends identified in Fannie Mae's historical dataset are predominant in loans owned not only by Fannie Mae but by other institutions as well. OCC RELEASES CRA EVALUATIONS FOR 20 BANKS e Office of the Comptroller of the Currency (OCC) recently released a list of Community Reinvestment Act (CRA) performance evaluations that became public in January. Of the 20 bank evaluations made public, two of them were rated "outstanding," while the other 18 were rated "satisfactory." e list includes evaluations of national banks, federal savings associations, and insured federal branches of foreign banks that have received ratings, according to the OCC. e possible ratings are outstanding, satisfactory, needs to improve, and substantial noncompliance. HSBC Trust Company and United Community Bank of Lawrenceburg, Indiana, were rated as "outstanding." None of the entities received ratings of "needs to improve" or "substantial noncompliance." e CRA is designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. e CRA prohibits the denying or increasing the cost of banking to residents of racially defined neighborhoods, better known as redlining, according to the OCC's website. e CRA instructs the appropriate federal financial supervisory agencies to encourage regulated financial institutions to help meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation. To enforce the statute, federal regulatory agencies examine banking institutions for CRA compliance and take this information into consideration when approving applications for new bank branches or for mergers or acquisitions.

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