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Plans to allow lenders working with Fannie Mae and Freddie Mac to provide credit reports from just two of the three nationwide consumer reporting agencies could result in as many as two million consumers being reclassified as ineligible to take out a mortgage, according to an analysis by TransUnion, one of the affected credit report providers.

The analysis — released Monday at the Mortgage Bankers Association’s annual convention in Philadelphia — also claimed that 600,000 mortgage borrowers a year might end up paying more interest under the move from tri-merge to bi-merge reporting.

“Using only two credit scores will often result in an incomplete and inaccurate picture being painted of a potential borrower — particularly if a consumer’s most favorable set of credit data is the one that gets excluded,” TransUnion said in releasing the analysis.

Borrowers with credit scores hovering around 620 would be the most likely to be affected, and that group is “disproportionately Black, Hispanic, low-to-moderate income (LMI) and first-time homebuyers,” TransUnion said.

The plan to move to a bi-merge process — allowing lenders to use two, instead of three credit reports — was announced last October by Fannie and Freddie’s regulator, the Federal Housing Finance Agency (FHFA).

Sandra Thompson

“We expect this change will reduce costs and further promote innovation while not compromising accuracy and predictiveness of a borrower’s ability to repay,” FHFA Director Sandra Thompson said in a keynote speech at last year’s MBA convention.

Eventually, lenders doing business with Fannie and Freddie will also be required to provide two credit scores — the FICO 10T and VantageScore 4.0 — which are seen as more inclusive and which will replace the Classic FICO score that’s been in use for nearly two decades.

But last month, FHFA announced that it would seek more public input on those plans, and won’t implement the bi-merge requirement in the first quarter of 2024 as initially proposed. While the FICO 10T and VantageScore 4.0 have been validated and approved by FHFA, lenders won’t be required to use both until an “extensive implementation process” is complete.

MBA President and CEO Bob Broeksmit welcomed the additional time, calling it “an acknowledgment of the significant operational complexities and the magnitude of this effort on the housing finance system, consumers, and investors of mortgage assets. MBA has advocated for a longer implementation timeline, and we appreciate FHFA taking our recommendations to heart.”

Consumer groups including the National Consumer Law Center (NCLC) have advocated for the proposed changes for nearly a decade, saying they’ll expand access to credit — particularly for borrowers with thin credit files or medical debt.

When the changes were announced last fall, NCLC Staff Attorney Chi Chi Wu also said that requiring lenders to use both FICO 10T and VantageScore will prevent the “Big Three” credit bureaus — TransUnion, Equifax and Experian — from “driving FICO out and leaving only VantageScore, which is a company owned by the Big Three.”

FICO announced on Oct. 5 that Movement Mortgage has become the first user of the FICO 10T, and that the companies “will work together to share early use insights for non-conforming products to help the mortgage industry understand the benefits of the most predictive credit score in the space. Movement Mortgage’s use of FICO Score 10T will provide opportunities to evaluate risk more efficiently in credit decisioning, as well as by the investor community.”

In its analysis, TransUnion also estimated that 200,000 consumers who would be deemed too risky to qualify under the tri-merge process will be deemed eligible by Fannie and Freddie under the bi-merge process, and “may find themselves in homes they cannot afford in an economic downturn.”

Those borrowers may pay “less interest than their true risk merits,” with Fannie and Freddie standing to lose out on up to $4 billion in risk-based interest fees every year, TransUnion claimed.

Jason Laky

“By intentionally bypassing vital consumer credit information from the third credit bureau, the proposed changes could result in miscalculated consumer affordability and risk,” said TransUnion executive Jason Laky, in a statement.

Get Inman’s Mortgage Brief Newsletter delivered right to your inbox. A weekly roundup of all the biggest news in the world of mortgages and closings delivered every Wednesday. Click here to subscribe.

Email Matt Carter

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