Validation and Approval of Credit Score Models, 41886-41908 [2019-17633]

Agencies

• FEDERAL HOUSING FINANCE AGENCY

[Federal Register Volume 84, Number 159 (Friday, August 16, 2019)]
[Rules and Regulations]
[Pages 41886-41908]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-17633]


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FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1254

RIN 2590-AA98


Validation and Approval of Credit Score Models

AGENCY: Federal Housing Finance Agency.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Agency (FHFA) is issuing a final 
rule on the process for validation and approval of credit score models 
by the Federal National Mortgage Association (Fannie Mae) and the 
Federal Home Loan Mortgage Corporation (Freddie Mac) (together, the 
Enterprises). The final rule defines a four-phase process for an 
Enterprise to validate and approve credit score models. The process 
begins with the Credit Score Solicitation (a solicitation by the 
Enterprises of applications from credit score model developers), 
followed by the Submission and Initial Review of Applications (an 
initial review by the Enterprise of submitted applications). The third 
phase is a Credit Score Assessment by the Enterprise, and the fourth 
phase is an Enterprise Business Assessment. The final rule establishes 
criteria for each of the four phases and includes required timing and 
notices for Enterprise decisions under the process.

DATES: This rule is effective: October 15, 2019.

FOR FURTHER INFORMATION CONTACT: Beth Spring, Senior Policy Analyst, 
Housing & Regulatory Policy, Division of Housing Mission and Goals, at 
(202) 649-3327, [email protected], or Kevin Sheehan, Associate 
General Counsel, (202) 649-3086, [email protected]. These are not 
toll-free numbers. The telephone number for the Telecommunications 
Device for the Deaf is (800) 877-8339.

SUPPLEMENTARY INFORMATION: 

I. Background

    Section 310 of the Economic Growth, Regulatory Relief, and Consumer 
Protection Act of 2018 (Pub. L. 115-174, section 310) amended the 
Fannie Mae and Freddie Mac charter acts and the Federal Housing 
Enterprises Financial Safety and Soundness Act of 1992 (Safety and 
Soundness Act) to establish requirements for the validation and 
approval of third-party credit score models by Fannie Mae and Freddie 
Mac.
    Section 310 provides that if an Enterprise elects to condition the 
purchase of a mortgage loan on the delivery of a borrower's credit 
score, that credit score must be produced by a model that has been 
validated and approved by the Enterprise. Section 310 imposes separate 
requirements on FHFA and the Enterprises. FHFA must first issue a 
regulation establishing standards and criteria for the validation and 
approval of credit score models by the Enterprises. Then, each 
Enterprise must publish a description of its validation and approval 
process that an Enterprise will use to evaluate applications from 
credit score model developers, consistent with the FHFA issued 
regulation.
    Section 310 sets forth several factors that must be considered in 
the validation and approval process, including the credit score model's 
integrity, reliability, and accuracy, its historical record of 
measuring and

[[Page 41887]]

predicting borrower credit behaviors (such as default rates), and 
consistency of the credit score model with the safe and sound operation 
of the Enterprises. The validation and approval process established by 
the final rule addresses each of the statutory factors, as well as 
additional standards and criteria consistent with section 310.
    On December 21, 2018, FHFA published in the Federal Register a 
notice of proposed rulemaking on the ``Validation and Approval of 
Credit Score Models.'' See 83 FR 65575. FHFA requested public comment 
on the proposed rule, including the standards and criteria for the 
validation and approval of credit score models by the Enterprises. FHFA 
received 60 comment letters on the proposed rule. FHFA reviewed and 
considered all comments received in response to the proposed rule. The 
final rule reflects adoption, clarifications, or changes based on the 
comments received. A full discussion of the adoption of certain 
provisions, clarifications, and changes to provisions are in the 
subsequent sections.

II. Major Provisions of the Final Rule

A. Validation and Approval Process

    The final rule generally adopts the validation and approval process 
set forth in the proposed rule. The validation and approval process 
outlines how an Enterprise will solicit applications from credit score 
model developers and assess credit score models for use. An Enterprise 
must publish a ``Credit Score Solicitation'' describing the 
requirements for credit score model developers to submit applications 
and the criteria under which the Enterprises will evaluate the 
applications.
    Following the ``Submission and Initial Review of Applications,'' in 
order for a credit score model to be approved for use, an Enterprise 
must complete two separate assessments. The first assessment is a 
``Credit Score Assessment,'' under which an Enterprise will evaluate 
the credit score model for accuracy, reliability and integrity. During 
the Credit Score Assessment, an Enterprise will evaluate the credit 
score model on a standalone basis, outside the Enterprise business 
systems and processes.
    The second assessment is an ``Enterprise Business Assessment,'' 
under which an Enterprise will evaluate the potential impact of using 
the credit score model within the Enterprise's proprietary business 
systems and processes. The Enterprise Business Assessment is a 
comprehensive evaluation of the potential impacts that using each 
credit score model could have on an Enterprise and the mortgage finance 
industry. The assessment will consider several factors leading to a 
decision for use by an Enterprise. Because the Enterprises' automated 
underwriting systems (AUS) treat credit scores differently, and because 
they have different risk tolerances, the Enterprise Business Assessment 
is designed to consider the credit score model's impact on an 
Enterprise's proprietary business use and risk management needs.
    The final rule clarifies that an Enterprise will submit a proposed 
approve or disapprove determination for each application to FHFA for 
review, and FHFA will make its determination taking into account the 
information provided by the Enterprise along with any other factors 
that FHFA determines appropriate.

B. Certification of Conflicts-of-Interest

    The final rule does not adopt the proposed conflict-of-interest 
certification requirement. The proposed rule would have required credit 
score model developers to demonstrate, upon applying for consideration, 
that there was no common ownership with a consumer data provider that 
has control over the data used to construct and test the credit score 
model.
    Under the final rule, any credit score model developer is able to 
submit an application in response to a Credit Score Solicitation, 
provided it meets the other requirements for applicants set forth in 
the Credit Score Solicitation.
    While the final rule permits credit score model developers that 
meet solicitation requirements to submit applications, the Enterprises 
will consider market and competition impacts as part of the Enterprise 
Business Assessment. This may include market or competition impacts 
related to the ownership structure of the credit score model developer 
and its relationship to other market participants. The Enterprise's 
consideration of market and competition impacts is consistent with the 
normal risk assessment and evaluation that an Enterprise would conduct 
with respect to other potential third-party providers or 
counterparties.

C. No Required Use of Credit Scores

    The final rule provides that an Enterprise is not required to use 
third-party credit scores for any business purpose. Section 310 does 
not require an Enterprise to use a third-party credit score model for 
any part of its business operations or purchase decisions. However, if 
an Enterprise conditions its purchase of mortgages on the provision of 
a credit score, section 310 requires that the score must be derived 
from a model that has been validated and approved in accordance with 
section 310 and this final rule. The validated and approved credit 
score must be used in all of the Enterprise's purchase-related systems 
and procedures that use a credit score.
    The final rule contemplates that if in the future an Enterprise no 
longer uses third-party credit scores in any purchase-related systems 
or procedures, the Enterprise would not be subject to the requirements 
in the final rule. Conversely, if an Enterprise uses credit scores as a 
consideration in setting the price for loans it purchases, for example 
by using Loan Level Price Adjustments (LLPAs) or Delivery Fees based on 
credit score and loan-to-value (LTV) ratios, the Enterprise is subject 
to the requirements of the final rule, even if the Enterprise no longer 
uses credit scores in any other manner.
    If a new credit score model is approved, the final rule permits an 
Enterprise to replace the existing credit score model or to continue to 
use the existing credit score model in addition to a newly approved 
credit score model. Section 310 expressly permits replacement of one 
validated and approved credit score model with another validated and 
approved credit score model, and does not establish any standard for 
replacement, other than the models must be validated and approved. 
Neither section 310 nor the final rule creates any right to or 
expectation of continued, future, or permanent use of any credit score 
model by an Enterprise, even if the model has been validated and 
approved.

D. Current Credit Score Model in Use

    Fannie Mae and Freddie Mac currently require lenders to provide 
credit scores derived from the Classic FICO credit score model for each 
loan delivered to the Enterprises.\1\ The final rule clarifies how 
Classic FICO will be evaluated under the validation and approval 
process. The final rule establishes criteria for the initial Credit 
Score Assessment that permit an Enterprise to evaluate Classic FICO on 
an expedited basis, if necessary, to meet statutory timeframes. This 
approach allows an Enterprise to complete the validation and approval 
process for the credit score model currently in use by the Enterprises 
and the mortgage

[[Page 41888]]

finance industry (Classic FICO). This evaluation may occur prior to a 
determination on any other application(s) received in response to the 
initial Credit Score Solicitation.
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    \1\ The Enterprises require delivery of FICO 5 from Equifax, 
FICO 4 from TransUnion, and FICO Score 2 from Experian, which are 
collectively referred to as ``Classic FICO.''
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    While the final rule makes no predetermination of which 
applications will be approved, FHFA expects that Classic FICO is likely 
to meet the applicable testing criteria based on its history of use. 
However, FHFA acknowledges 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. FHFA expects that the Enterprises will also evaluate applications 
received in response to the initial Credit Score Solicitation and that 
the Enterprises may submit to FHFA a proposed determination to approve 
one or more of those credit score models for use, either to replace 
Classic FICO or in addition to Classic FICO.

III. Summary of Comments Received and FHFA Responses

    In response to the proposed rule, FHFA received 60 comment letters 
during the 90-day comment period.\2\ Comments were received from all 
segments of the mortgage industry, including: Mortgage insurers, 
mortgage originators, Mortgage Backed Securities (MBS) and Credit Risk 
Transfer (CRT) investors, technology vendors, housing advocates, 
industry trade groups, Congressional members, and other interested 
stakeholders. FHFA considered all comments received in response to the 
proposed rule. While the final rule adopts most of the provisions from 
the proposed rule, FHFA has incorporated a number of changes. A 
discussion of FHFA's rationale for all components of the final rule, 
including responses to significant issues raised by comment letters, is 
set forth below.
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    \2\ https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Validation-and-Approval-of-Credit-Score-Models.aspx.
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A. Validation and Approval Process and Timelines

    FHFA proposed that the validation and approval process have four 
phases, with the first phase being a solicitation for applications from 
credit score model developers, the second phase being the submission 
and initial review of applications, the third phase being a Credit 
Score Assessment, and the last phase being an Enterprise Business 
Assessment. The final rule adopts these four phases as proposed and 
establishes minimum standards and criteria for each phase. Consistent 
with section 310 and the proposed rule, the final rule permits an 
Enterprise to add to the standards and criteria for all four phases of 
the process. In general, comments received on the four phases in the 
proposed rule were supportive of this approach.
    The proposed rule also set out timelines for the completion of each 
phase of the validation and approval process. Section 310 requires that 
an Enterprise provide notice of a ``determination'' to an applicant 
within 180 days from receipt of a complete application, with two 
possible 30-day extensions. While recognizing that statutory provision, 
the proposed rule set forth timelines that reflect the length of time 
FHFA believes, based on similar analysis conducted in 2015, is 
necessary for an Enterprise to complete the acquisition of consumer 
credit data for testing of each credit score model and the empirical 
and business analysis of each credit score. FHFA received a few comment 
letters that supported the need to separate the Credit Score Assessment 
from the Enterprise Business Assessment. Commenters were split on the 
length of time proposed for each phase. Some commenters stated that the 
maximum total time allowed for completion of the process was too long.
    The final rule adopts the four phases and the associated timeframes 
as proposed. Specifics of the four phases are explained in more detail 
below.
1. Proposed and Final Rule
    Under both the proposed rule and the final rule, each Enterprise 
must publish a Credit Score Solicitation as part of the solicitation 
phase of the process. The Credit Score Solicitation will specify the 
opening and closing dates of the solicitation time period during which 
the Enterprise will accept applications from credit score model 
developers. FHFA expects that the Credit Score Solicitation will 
include a description of the information that must be submitted with 
the application; instructions for submitting the application; a 
description of the Enterprise process for obtaining data for testing; a 
description of the Enterprise's process/criteria for conducting the 
Credit Score Assessment and the Enterprise Business Assessment; and 
other requirements established by the Enterprise consistent with 
section 310.
    In the Submission and Initial Review of Applications phase, the 
Enterprise will determine whether each application submitted by a 
credit score model developer is complete. An application would be 
complete only after the Enterprise has received all required fees and 
information from the applicant as well as any data that must be 
obtained from a third party. If an application is not complete, the 
Enterprise must notify the applicant and provide an opportunity for the 
applicant to submit any information that the Enterprise determines 
necessary for the evaluation of the application.
    During the Credit Score Assessment phase of the process, each 
credit score model will be assessed for accuracy, reliability, and 
integrity, independent of the use of the credit score in the 
Enterprise's systems. The Credit Score Assessment will also include any 
other requirements established by the Enterprise.
    During the Enterprise Business Assessment phase, which is the 
fourth and final phase of the process, an Enterprise will assess the 
credit score model in conjunction with the Enterprise's business 
systems and processes. The Enterprise must assess the accuracy and 
reliability of credit scores when used within the Enterprise's systems. 
The Enterprise must assess possible impacts on fair lending and on the 
Enterprise's operations and risk management. An Enterprise also must 
consider impacts on the mortgage finance industry, assess competitive 
effects, conduct a third-party provider review, and perform any other 
evaluations established by the Enterprise as part of the Enterprise 
Business Assessment.
2. Comments Received and Final Rule Rationale
    Commenters were generally supportive of the proposed four phases, 
and the final rule adopts this approach. Based on the comments received 
and prior work related to analyzing credit score models, the four-phase 
approach is operationally practical. The four-phase approach is also 
consistent with the statutory requirements of section 310.
    Some commenters stated that the proposed timeline for the 
solicitation, review and assessment of applications was too long. One 
commenter stated that the ``long, drawn out process does not encourage 
the competition contemplated by Sec. 310.'' On the other hand, the 
Enterprises commented that they support the four-phased approach, and 
the timelines outlined in the proposed rule. The timelines in the 
proposed rule were informed by the work related to assessing credit 
score models conducted by FHFA and the Enterprises from 2015 to 2018 
pursuant to FHFA's Conservatorship Scorecards. The final rule adopts 
the proposed timelines associated with completion of each phase of the 
process because they

[[Page 41889]]

appropriately allow for completion of the provisions required by 
section 310. The timelines allow the Enterprises an appropriate amount 
of time to process applications, and they reasonably reflect prior FHFA 
and Enterprise experience regarding the amount of time needed to test 
and evaluate credit score models. The timelines adopted in the final 
rule reflect the maximum number of days allowable to complete the 
entire process, and in FHFA's judgment, are necessary to reasonably 
achieve the objectives of the statute.
    The timeframes set out in the final rule do not address the time it 
will take the industry to prepare for a change in credit score 
requirements. One commenter stated consideration of any credit score 
model should include ``the time, effort, complexity, uncertainty, and 
costs (direct and indirect) to the mortgage industry of alternative 
decisions.'' As discussed in the proposed rule, implementation timing 
is not addressed in section 310. Implementation of any change to 
existing credit score requirements will have significant operational 
and cost implications for the Enterprises and the mortgage finance 
industry. FHFA expects that full implementation of any change to the 
Enterprise credit score requirements will take the industry as long as 
24 months after a new credit score model is approved. The final rule 
does not address how an Enterprise's credit score requirements might 
change following the approval of a new credit score model. How an 
approved credit score model(s) is implemented, including the timeframe 
for the Enterprises to transition from one credit score to another 
score or scores, is best addressed outside of the final rule. FHFA will 
provide direction to the Enterprises on implementation issues 
consistent with applicable law.
    Some comment letters stated that the validation and approval phases 
should be done simultaneously. Under the final rule, the Credit Score 
Assessment and Enterprise Business Assessment phases may be conducted 
sequentially, or in unusual or unique circumstances such as the initial 
solicitation, simultaneously. In some cases, an Enterprise may want to 
have the results of the Credit Score Assessment before initiating the 
Enterprise Business Assessment. In other cases, an Enterprise may 
conduct some or all of the Enterprise Business Assessment at the same 
time it is conducting the Credit Score Assessment. In all cases, in 
order for a credit score model to be approved for use, the credit score 
model would have to pass both a Credit Score Assessment and an 
Enterprise Business Assessment. As discussed in more detail below, the 
final rule clarifies that FHFA's review of a proposed determination by 
an Enterprise must include a decision by FHFA to either approve or 
disapprove the proposed determination. Under the final rule, if an 
Enterprise finds that an application should be approved, the Enterprise 
must submit a proposed determination recommending approval of a credit 
score model to FHFA at the conclusion of the Enterprise Business 
Assessment phase. However, the credit score model will only be 
considered validated and approved for purposes of the regulation and 
section 310 if an Enterprise makes a final determination to approve the 
credit score model after FHFA has completed its review.
    With regard to communication with applicants during the Enterprise 
review process, one commenter noted the possible need for additional 
interaction with applicants concerning issues in their applications. As 
noted above, the final rule provides for an Enterprise to request 
supplemental information from the applicant if necessary, which will 
allow the Enterprises to have those additional interactions.
    Several comments were in favor of the Enterprises conducting a 
joint Credit Score Assessment. The comments that supported a joint 
assessment indicated that it is likely to lead to a more efficient 
process. The final rule does not prohibit the Enterprises from 
conducting a joint Credit Score Solicitation and/or Credit Score 
Assessment. The Enterprises may choose to issue a joint Credit Score 
Solicitation and to collaborate on the Credit Score Assessment of 
credit score models outside of their automated underwriting systems. A 
joint approach may minimize costs and operational burdens with these 
phases. However, the Enterprises will have to consider each credit 
score model that passes the Credit Score Assessment in an independent 
Enterprise Business Assessment because of differences in their 
respective business systems and processes.

B. Alignment of Enterprises

    The preamble to the proposed rule stated that FHFA may direct the 
Enterprises to align their assessment processes or their decisions on 
which credit score models to approve. The final rule includes three 
separate provisions that FHFA may use to direct the Enterprises at 
different stages of the validation and approval process. The final rule 
does not itself require the Enterprises to align their processes or 
outcome decisions. This approach is consistent with the proposed rule 
in providing flexibility for FHFA and the Enterprises to ensure that 
the Enterprises are able to respond appropriately to the primary market 
and to their own business requirements and objectives, as well as to 
manage their operations in a manner that is safe and sound.
1. Proposed Rule
    The proposed rule provided for FHFA review at two points in the 
validation and approval process. First, the proposed rule required each 
Enterprise to submit its Credit Score Solicitation for FHFA review 
before making it publicly available. The proposed rule stated that FHFA 
could approve or disapprove the Credit Score Solicitation, and may 
impose any appropriate terms, conditions, or limitations on its 
approval. Second, the proposed rule would have required each Enterprise 
to notify FHFA of any decision to approve or disapprove a credit score 
model application prior to an Enterprise's notification to the 
applicant or the public. The preamble to the proposed rule indicated 
that this notice requirement would provide FHFA with an opportunity to 
make any determinations or take any steps appropriate in FHFA's 
capacity as conservator or as safety and soundness regulator with 
respect to changes, updates to, or replacement of any credit score 
model, including alignment of outcomes.
2. Comments Received
    FHFA received several comments that either supported alignment of 
the Enterprises or expressed concern that the rule would permit the 
Enterprises to approve for use different credit score models. For 
example, one commenter stated that it is necessary and appropriate for 
FHFA to align Enterprise usage of credit scores to ensure that Fannie 
Mae and Freddie Mac securities are as homogeneous as possible. Other 
commenters emphasized the potential cost and operational impacts if the 
Enterprises do not align on which credit scores they require.
    FHFA also received comments on the impact that alignment of the 
Enterprise credit score requirements could have on FHFA regulations 
such as the Enterprise capital requirements (Conservatorship Capital 
Framework) and other Enterprise policies, such as the Private Mortgage 
Insurer Eligibility Requirements (PMIERs). For example, one commenter 
noted that credit scores are used by the mortgage insurance industry 
``in a variety of ways, including to determine borrower eligibility, 
pricing, and to calculate the amount of

[[Page 41890]]

capital required to comply with the Enterprises' capital and 
operational standards for [private mortgage insurers].'' Two commenters 
raised a concern about the Enterprises using different credit score 
models to assess the creditworthiness of borrowers, which they stated 
could raise the risk of a divergence in the performance of loans 
collateralizing their mortgage backed securities, potentially causing 
prepayment speeds to differ in the Uniform Mortgage Backed Security 
(UMBS). Commenters also noted that any change in the credit score model 
would require other policies and requirements such as PMIERs and the 
Enterprise capital requirements to be recalibrated based on the new 
credit score model.
3. Rationale for Final Rule
    While the final rule does not require the Enterprises to align on 
processes or outcomes related to validation and approval of credit 
score models, the final rule permits FHFA to require alignment of the 
Enterprises on any aspects of the validation and approval process, 
including which credit score model or models would be approved for use. 
Based on the comments received and FHFA's own assessment of potential 
impacts, it is likely that FHFA would have to consider whether the 
Enterprises should align their credit score requirements, whether the 
Enterprises remain in conservatorship or not. The final rule expands on 
the proposed rule provisions for FHFA review at different stages of the 
validation and approval process to provide clarity for applicants and 
the Enterprises on how FHFA, as conservator or regulator, may require 
alignment of the Enterprises.
    As stated above, the final rule expands on three provisions FHFA 
may use to direct the Enterprises at different stages of the validation 
and approval process to address alignment. First, the final rule 
maintains the proposed provision for FHFA review of the Enterprise 
Credit Score Solicitation. As in the proposed rule, the final rule 
states explicitly that FHFA may approve or disapprove the Credit Score 
Solicitation and may impose any terms, conditions, or limitations on 
its approval. This will allow FHFA to require an Enterprise to make any 
changes that FHFA determines appropriate, including any changes that 
may be necessary to align the respective Enterprise processes.
    Second, the final rule adds a new provision for FHFA to undertake 
an evaluation concurrent with the 240-day Enterprise Business 
Assessment phase. FHFA's evaluation during the Enterprise Business 
Assessment phase will focus on potential impacts on other regulations 
and aligned Enterprise policies. This evaluation could include how the 
Enterprise use of credit scores may impact the PMIERs, the UMBS 
regulation, CRT transactions, and the Enterprise capital requirements. 
For example, under the PMIERs, the risk-based required asset amounts 
for mortgage insurers are based on factors including the original LTV 
ratio of the insured loan, the original credit score for the loan, the 
loan vintage, and other factors. A change to the credit score 
requirements of the Enterprises would require an update to the PMIERs 
requirements to reflect a new credit score model.
    FHFA's evaluation during the Enterprise Business Assessment will 
provide an opportunity for FHFA to determine the feasibility of 
implementing multiple credit score models. FHFA may make this decision 
in its capacity as conservator under existing FHFA authorities or as 
safety and soundness regulator under the approval authority provided by 
this final rule. For example, FHFA may consider the impact on 
Enterprise loan pricing if the Enterprises permit the use of more than 
one credit score model by lenders. FHFA may require the Enterprises to 
maintain a single credit score model if the secondary market liquidity 
were expected to decline if multiple credit score models were 
permitted, or if FHFA determines there are other policies or 
regulations that require alignment on credit score model requirements.
    Finally, the final rule revises the proposed provision regarding 
prior notice to FHFA of an Enterprise determination based on the 
Enterprise Business Assessment. The proposed rule provided for 45-day 
prior notice to FHFA of any determination by an Enterprise on an 
application. This would have required an Enterprise to make an approval 
determination and submit that approval determination to FHFA for 
review. The preamble to the proposed rule indicated that FHFA could 
take appropriate steps in FHFA's capacity as conservator or as safety 
and soundness regulator in response to the prior notice, but the 
proposed rule did not explicitly state that FHFA could approve or 
disapprove the Enterprise determination at this stage.
    The final rule provides that an Enterprise must submit a proposed 
determination to FHFA. FHFA will review the Enterprise proposal and 
either approve it or disapprove the proposed determination. The final 
rule provides that FHFA must approve or disapprove the Enterprise's 
proposed determination during the 45-day prior notice period. The 
requirement for FHFA approval or disapproval will provide a mechanism 
for FHFA to ensure that the Enterprises reach aligned decisions on 
which credit score model or models to approve, if FHFA determines that 
alignment of the Enterprises is appropriate.
    FHFA acknowledges the concerns raised by commenters about the 
potential costs and complexity that may arise if the Enterprises follow 
different processes, apply different criteria, or reach different 
decisions on which credit score model(s) to use and how they would be 
used. However, the final rule is flexible enough to allow FHFA to 
require alignment in areas where FHFA determines alignment is 
appropriate, and to allow the Enterprises to be different in other 
areas. For example, Fannie Mae and Freddie Mac currently treat credit 
scores in different ways in their respective AUSs. Fannie Mae uses 
credit scores as an eligibility threshold for its AUS, while Freddie 
Mac uses credit scores as one factor in the risk assessment for its 
AUS. As a result, in implementing the final rule, the Enterprises may 
consider different factors in their respective Enterprise Business 
Assessments based on how they each use credit scores in their own 
business systems.
    The final rule does not require the Enterprises to use identical 
processes for evaluating credit score models, and the final rule does 
not require the Enterprises to reach identical decisions on which 
credit score models to approve through the validation and approval 
process.
    However, the final rule provides for several points at which FHFA 
may consider whether a greater or lesser degree of alignment is needed 
to address the needs of the mortgage market or the statutory mission of 
the Enterprises, including to promote access to mortgage credit 
throughout the Nation. For example, FHFA may exercise this discretion 
to enhance processing efficiency in the mortgage market, to enhance the 
safety and soundness of the Enterprises, or to reduce costs for 
lenders, borrowers, and others.

C. No Requirement for Conflicts-of-Interest Certification

    The proposed rule would have required each applicant to provide a 
certification regarding conflicts of interest as part of its 
application. The final rule does not adopt this requirement and instead 
permits credit score model developers to submit applications to the 
Enterprises in

[[Page 41891]]

response to a Credit Score Solicitation, regardless of the ownership 
structure of the credit score model developer. However, the final rule 
permits consideration of conflicts of interests as part of a 
comprehensive Enterprise Business Assessment.
1. Proposed Rule
    The proposed rule required that a credit score model developer 
certify in its application that the credit score model developer has no 
common ownership or affiliation with the owner of data used to 
construct the credit score model. This conflicts-of-interest 
certification was proposed to address concerns about vertical 
integration of the nationwide consumer reporting agencies (CRAs), and 
to address current and potential future affiliations between data 
providers and analytic companies that own algorithms used to generate 
credit scores. For example, VantageScore Solutions, LLC is jointly 
owned by the three nationwide CRAs. The CRAs also own, price, and 
distribute consumer credit data and credit scores. This type of common 
ownership could in theory negatively impact competition in the 
marketplace.
    The proposed rule discussed concerns that the CRAs could 
potentially use their position in the marketplace in a manner that 
favors VantageScore Solutions, LLC over its current and future 
competitors. The proposed rule would have addressed these concerns by 
prohibiting common ownership or control of a credit score model 
developer and the owner of the consumer credit data that is needed to 
construct the model and to generate the credit scores.
    The proposed rule also required each applicant to provide 
information about its market experience and financial capacity. Such 
information included a detailed description of the credit score model 
developer's corporate structure and business relationships, governance 
structure, and past financial performance, including audited financial 
statements for the preceding three years.
2. Comments Received
    FHFA received numerous comments on the proposed conflicts-of-
interest certification, both supporting the proposed restriction and 
opposing the proposed restriction. Commenters against the proposed 
conflicts-of-interest certification raised three main arguments. First, 
several commenters stated that the proposed conflicts-of-interest 
certification requirement was not consistent with the spirit or letter 
of section 310. One commenter stated that ``the Proposed Rule directly 
conflicts with the spirit and intent of the Credit Score Competition 
provisions within the Economic Recovery, Regulatory Relief and Consumer 
Protection Act (S.2155); where Congress recognized that competition is 
vital in commercial markets and therefore required that the FHFA allow 
existing credit scoring models to compete with the incumbent scoring 
company.''
    Second, some commenters stated that open competition among credit 
score model developers would lead to improved credit score models and 
would benefit borrowers. One commenter stated that ``[f]or over a 
decade, VantageScore LLC has competed and provided demonstrable value 
in other lending markets without any tangible harm to its rivals, and 
most importantly, consumers have benefitted from greater access to 
financial opportunity.''
    Third, commenters argued that the proposed conflicts-of-interest 
certification is unnecessary because antitrust laws already prohibit 
the types of anti-competitive behavior that the conflicts-of-interest 
certification was intended to prevent. One commenter stated that 
``[t]he antitrust statutes are very clearly designed to prevent exactly 
the type of anticompetitive behavior the FHFA is concerned about and if 
necessary, those statutes may be readily invoked to provide relief.''
    FHFA also received comments supporting the proposed conflicts-of-
interest certification. These comments expressed concerns about the 
potential negative effects on competition that may result if the owner 
of consumer credit data needed to develop competing credit score models 
and distribute credit scores into the marketplace also owns or controls 
a credit score model developer. One comment stated that ``[t]he 
Enterprises must be required and allowed to judge competing scoring 
approaches and their effects on reliability and performance based 
solely on the merits, without the inevitable distortions brought about 
by data owners' simultaneous control of the data, the credit score 
model, and the means of credit score distribution.''
    Another commenter indicated that the proposed independence 
requirement is needed to promote open and fair competition among credit 
score developers, stating that the proposed certification requirement 
``shows serious consideration for ensuring open and fair competition in 
the submission and evaluation of new credit scoring models that is 
welcome and needed.'' Another commenter suggested that the competitive 
concerns about common ownership could be mitigated if the CRAs 
transferred their contractual control of the credit score distribution 
channel and pricing. Commenters supporting independence of credit score 
model developers also argued that there is the potential for 
competitive harm resulting from vertical integration of credit score 
model developers and the CRAs that own the data used to construct and 
test such models.
    Although not addressed in the proposed rule, some commenters 
expressed support for other changes that could foster competition. For 
example, some commenters supported an approach that would allow lenders 
to choose among multiple validated and approved credit scores. Opposing 
this view were commenters expressing concerns about adverse selection 
and impact on investors if lenders were permitted to select the credit 
score used to underwrite a borrowers mortgage.
    A number of commenters also noted that increased competition and 
improvements to credit score models may result from adopting newer data 
types and sources. For example, some commenters supported the use of 
data outside of the CRAs, such as rental and telecommunications data. 
While FHFA believes there are other consumer data sources that could 
potentially be useful, the proposed and final rule do not address, or 
create any provision related to, required use of alternative data 
consistent with section 310.
3. Rationale for Final Rule
    The final rule does not include the proposed conflicts-of-interest 
certification requirement. Instead, the final rule permits credit score 
model developers to submit applications for consideration by the 
Enterprises, without having to demonstrate that there is no affiliation 
or common ownership of the credit score model developer with data 
provider(s). The independence requirement was intended to encourage 
additional credit score developers to enter the mortgage marketplace. 
The proposed rule reflected concerns that the CRAs lacked an incentive 
to support new entrants because of their ownership of VantageScore 
Solutions, LLC. However, FHFA recognizes that there are many other 
factors that may affect the potential entrance of new credit scoring 
companies into the industry.
    Despite the concerns raised by some commenters about potential 
impacts on competition, FHFA has concluded that allowing all credit 
score model developers to submit applications is more consistent with 
section 310, which does not prevent any credit score model

[[Page 41892]]

from being considered for potential use in the mortgage market. 
Therefore, the final rule does not require a credit score model 
developer to provide a conflicts-of-interest certification with its 
application.
    While all credit score model developers are permitted to apply for 
consideration regardless of ownership structure, the final rule adopts 
the proposed requirement that a credit score model developer provide 
all information necessary for an Enterprise to evaluate the credit 
score model developer. Such information may include relevant experience 
of the applicant and financial capacity of the applicant. The final 
rule requires, as part of the Enterprise Business Assessment, 
evaluating whether use of a credit score model could have an impact on 
competition in the industry. The Enterprise must consider whether such 
impact is due to any ownership or other business relationship between 
the credit score model developer and any other institution. The 
assessment of competitive effects is discussed in more detail below.

D. Frequency of Solicitation of Applications

    The proposed rule provided that FHFA would require the Enterprises 
to solicit applications from credit score model developers at a minimum 
once every seven years, unless FHFA determined that a solicitation 
should occur more or less frequently. The proposed minimum frequency 
for solicitations was based on prior feedback from the industry on the 
significant cost and operational complexity of updating the credit 
score required by the Enterprises. For example, responding to FHFA's 
December 2017 Request for Information (RFI), representatives from the 
mortgage insurance industry requested 24 months to transition from the 
current credit score to a new credit score.\3\ However, several 
comments on the proposed rule stated that seven years is too long, and 
that the seven years would not align with the rate of innovation or 
advances in technology and data.
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    \3\ https://www.fhfa.gov/PolicyProgramsResearch/Policy/Pages/Credit-Scores.aspx.
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    The final rule provides that FHFA will require the Enterprises to 
open a solicitation period as FHFA determines necessary. FHFA may 
require a new solicitation on its own initiative or in response to a 
request from any party, including an Enterprise. The final rule 
requires FHFA to make a determination on whether it is necessary for 
the Enterprises to open a solicitation for credit score model 
developers to apply for consideration.
1. Proposed Rule
    The proposed rule stated that FHFA would require the Enterprises to 
solicit applications from credit score model developers at least once 
every seven years, unless FHFA determined that a solicitation should 
occur more or less frequently. FHFA would establish the solicitation 
requirement by notice to the Enterprises, which would include: (1) A 
requirement for the Enterprises to submit a Credit Score Solicitation 
to FHFA for review; (2) a deadline for submission of the Credit Score 
Solicitation to FHFA; and (3) a timeframe for the solicitation period 
in which the Enterprises would accept applications.
    In connection with each required solicitation, the proposed rule 
would have required an Enterprise to submit to FHFA a Credit Score 
Solicitation including: (1) The opening and closing dates of the 
solicitation time period during which the Enterprise will accept 
applications from credit score model developers; (2) a description of 
the information that must be submitted with an application; (3) a 
description of the process by which the Enterprise would obtain data 
for the assessment of the credit score model; (4) a description of the 
process for the Credit Score Assessment and the Enterprise Business 
Assessment; and (5) any other requirements as determined by the 
Enterprise.
2. Comments Received
    FHFA received comments expressing a range of views on the 
appropriate frequency for solicitation of new credit score models. One 
commenter stated that ``[w]ith respect to the frequency of the 
validation and approval process, the proposed rule contemplates FHFA 
requiring Enterprise solicitation of new credit score models every 
seven years. This cycle allows sufficient time for the completion of 
each validation and approval process, though it may not allow the 
Enterprises to be as responsive as possible when new technologies or 
data sources emerge.'' The commenter therefore recommended that ``FHFA 
more frequently evaluate whether a new solicitation would provide 
significant benefits to the market, such that it is prepared to begin 
the process earlier than the seven year threshold if warranted.'' 
However, another commenter cautioned that ``frequent and radical 
changes to credit score models may raise the cost and complicate 
implementation even more . . .''
3. Rationale for Final Rule
    The final rule provides that FHFA will determine the frequency of 
credit score solicitations in its discretion. FHFA may initiate a 
solicitation at its own initiative or in response to a request 
submitted to FHFA by any person, including an Enterprise. While the 
final rule does not include the proposed baseline frequency of once 
every seven years, the final rule approach is consistent with the 
proposed rule, which would have allowed FHFA to require a solicitation 
either more or less frequently.
    Recognizing that comments on the proposed rule encouraged FHFA to 
consider opening solicitations more frequently, the final rule does not 
include a seven-year solicitation cycle. Instead, the final rule allows 
FHFA to establish the frequency of the solicitation in response to the 
need and justification from either the industry or an Enterprise. FHFA 
can open the solicitation window as frequently or as infrequently as 
necessary, assuming there is reasonable justification to do so.
    The final rule strikes a balance between the comments concerned 
about the potential cost and impact of frequent solicitations and the 
comments concerned that infrequent solicitations would not be 
responsive to advances in technology and data. The validation and 
approval process is potentially time-consuming and costly, and the 
implementation of any changes to the credit score model in use by the 
Enterprise and the industry would entail substantial time, cost, and 
effort by many parties. For that reason, it would be impractical and 
too costly to require the Enterprise to solicit applications on a 
rolling or annual basis. At the same time, FHFA recognizes that a 
seven-year cycle may be too long to take into account innovations and 
advances in technology and data. FHFA may initiate solicitations more 
or less frequently depending on technology, improved data, or other 
compelling reasons to do so.

E. Fair Lending Compliance and Certification

    The proposed rule included fair lending compliance provisions in 
two phases of the credit score model validation and approval process. 
First, the proposed rule would have required a certification by the 
credit score model developer in the application phase. Second, the 
proposed rule would have required the Enterprises to assess fair 
lending impacts during the Enterprise Business Assessment. The final 
rule

[[Page 41893]]

retains both of these fair lending provisions. The final rule also adds 
a requirement that the Enterprises evaluate the potential impact of 
using a particular credit score model on access to credit.
1. Proposed Rule
    The proposed rule included two provisions related to fair lending. 
First, in the application phase, the credit score model developer would 
have been required to certify that no characteristic that is based 
directly on or is highly correlated solely with a classification 
prohibited under the Equal Credit Opportunity Act (15 U.S.C. 
1691(a)(1)), the Fair Housing Act (42 U.S.C. 3605(a)), and the Safety 
and Soundness Act (12 U.S.C. 4545(1)) was used in the development of 
the credit score model or was used as a factor in the credit score 
model to produce credit scores. The proposed rule would have required 
the credit score model developer to provide information in its 
application on any fair lending testing and evaluation of the model 
conducted. Second, in the Enterprise Business Assessment phase, the 
Enterprises would have been required to evaluate the fair lending risk 
and fair lending impact of the credit score model and credit scores 
produced by it in accordance with standards and requirements related to 
federal fair lending laws.
2. Comments Received and Final Rule Rationale
    Comments on the proposed fair lending provisions were generally 
supportive of both the proposed certification requirement in the 
application phase and the proposed fair lending assessment in the 
Enterprise Business Assessment. Some commenters recommended that FHFA 
expand the fair lending requirements to include additional requirements 
for fair lending testing. Commenters also supported adding as part of 
the Enterprise Business Assessment a requirement to assess potential 
impacts on access to credit from any change to the credit score model 
requirements of the Enterprises.
    The final rule retains fair lending compliance provisions in both 
the application and Enterprise Business Assessment phases and adds a 
requirement that the Enterprises consider potential impacts on access 
to credit in response to feedback received in the comments.
    The compliance and certification requirements in the application 
phase of the final rule are the same as the proposed rule. Some 
commenters suggested requiring fair lending testing by the credit score 
model developer in the application's fair lending certification.
    The final rule requires each application to include a certification 
that no characteristic used in the development of the credit score 
model or as a factor in the credit score model to produce credit scores 
is based directly on or is highly correlated solely with a prohibited 
classification. In the final rule, each application must address 
compliance of the credit score model and credit scores produced by it 
with federal fair lending requirements and provide information on any 
fair lending testing and evaluation of the model conducted. FHFA 
expects credit score model developers to have a sufficient basis for 
making the certification and addressing the application requirement, 
but the final rule does not prescribe or require any particular method 
of evaluation or testing.
    Some commenters proposed inserting ``current'' before ``federal 
fair lending requirements'' out of a concern that federal fair lending 
requirements may change due to rulemakings, acts of Congress, and court 
decisions. FHFA recognizes that applicable legal standards, including 
the Fair Housing Act, Equal Credit Opportunity Act, and Safety and 
Soundness Act, may change over time. The proposed rule was not limited 
to federal fair lending requirements as of a particular date, and the 
final rule does not include any change on this point.
    The final rule includes the proposed fair lending assessment 
requirements in the Enterprise Business Assessment phase. Commenters 
supported the fair lending compliance component in the Enterprise 
Business Assessment. One commenter recommended including disparate 
impact testing in the fair lending assessment. The final rule refers to 
the standards and requirements of applicable fair lending authorities. 
The final rule itself does not describe the compliance standards for 
those authorities. However, the rule does require an evaluation of the 
fair lending risk and fair lending impact associated with those fair 
lending authorities, including identification of potential impact, 
comparison of the new credit score model with any credit score model 
currently in use, and consideration of potential methods of using the 
new credit score model.
    The proposed rule also requested comments on whether the Enterprise 
Business Assessment should consider whether the credit score model may 
have any impact on access to mortgage credit. Commenters were 
supportive of requiring this analysis. Some commenters stated that 
access to mortgage credit is a critical component of building wealth 
that has historically been limited on the basis of protected factors. 
The final rule requires an Enterprise to consider possible impacts on 
access to credit as part of the Enterprise Business Assessment.

F. Qualifications of Credit Score Model Developer

    The proposed rule would have required that the Enterprises review, 
in accordance with their third-party provider management policies and 
procedures, the corporate structure, governance structure, and past 
financial performance of the credit score model developer, including 
three years of audited financial statements to demonstrate financial 
strength of the credit score model developer. As discussed previously, 
the final rule includes the proposed requirements on the evaluation of 
the financial strength of the credit score model developer, but the 
final rule does not include the proposed application requirement for 
three years of audited financial statements. FHFA expects that the 
Enterprises will consider any guidance that FHFA has issued in its 
supervisory capacity to the regulated entities on the oversight of 
third-party provider relationships.
1. Proposed Rule
    The proposed rule would have required that each application include 
any information that an Enterprise may require to evaluate the credit 
score model developer (i.e., relevant experience and financial 
capacity). Such information would include a detailed description of the 
credit score model developer's: (i) Corporate structure, including any 
business relationship to any other person through any degree of common 
ownership or control; (ii) governance structure; and (iii) past 
financial performance, including audited financial statements for the 
preceding three years.
2. Comments Received
    Several commenters opposed the proposed requirement that applicants 
provide audited financial statements for the preceding three years, 
stating that such a requirement was arbitrary or unreasonable and the 
Enterprises should manage their vendor risk through their existing 
third-party management process. Several commenters raised concerns 
about the burden associated with providing three years of audited 
financial statements.

[[Page 41894]]

One commenter stated that ``since credit score model developers are not 
counterparties, there is no need to require an assessment of developers 
at the rigorous level proposed.''
3. Rationale for Final Rule
    The final rule does not adopt the proposed three year audited 
financial statements requirement. The final rule is less prescriptive 
than the proposed rule in establishing criteria for assessing the 
financial strength of credit score model developers. The final rule 
requires an applicant to submit information related to its organization 
and financial strength in its application, and the final rule requires 
an Enterprise to assess the financial strength of the credit score 
model developer as part of the Enterprise Business Assessment. However, 
the final rule does not include the proposed requirement that a credit 
score model developer provide three years of audited financial 
statements. This change will provide more flexibility for an Enterprise 
to determine what information is necessary for its review and 
potentially more flexibility to applicants submitting such information.
    FHFA has provided supervisory guidance to the Enterprises on 
managing risks associated with third-party providers. The guidance 
describes FHFA's supervisory expectations, including that an Enterprise 
review audited financial statements, equivalent financial information, 
or other evidence of creditworthiness and financial viability. This 
review should consider whether the third-party provider will be able to 
continue to perform its role for the foreseeable future. The level of 
review, and documentation required, will vary depending on the 
financial risk to an Enterprise and/or the viable alternatives to the 
third-party provider.
    Effective risk management of third-party provider relationships is 
essential to the safe and sound operations of the Enterprises. It is 
not necessary for the final rule to reference guidance that is already 
applicable to the Enterprises or to impose specific requirements 
related to third-party provider financial information. FHFA expects the 
Enterprises to consider applicants in accordance with any applicable 
FHFA guidance on the financial strength of third-party providers that 
is in effect at the time of the relevant Credit Score Solicitation.
    The final rule also permits the Enterprises to establish additional 
requirements for qualifications of credit score model developers. The 
Enterprises are required to include any such additional requirements in 
the Credit Score Solicitation, and those requirements are subject to 
FHFA review and approval as discussed above.

G. Demonstrated Use

    The proposed rule would have required an applicant to demonstrate 
use of the credit score by creditors to make lending decisions. The 
proposed rule would not have established a standard for meeting the 
demonstrated use component, but permits an Enterprise to address 
criteria for demonstrating use in its Credit Score Solicitation. The 
final rule adopts the same approach.
1. Proposed Rule
    The proposed rule would have required the applicant to demonstrate 
use of its credit score model by creditors to make credit decisions. 
The requirement was designed to ensure that all credit score models 
considered by an Enterprise are used or employed by lenders. The 
proposed rule discussed various options for how an applicant might 
demonstrate use (e.g., testimonials by non-mortgage and/or mortgage 
lenders).
2. Comments Received
    Most commenters supported the proposed requirement that applicants 
demonstrate use of the credit score by creditors to make credit 
decisions. One commenter suggested that this requirement could be 
expanded to require ``substantial use in originating and securitizing 
consumer credit products of the same credit quality as the 
conventional, conforming mortgage loans that the Enterprises purchase 
and securitize.'' In addition, commenters encouraged FHFA to include in 
the final rule an ``objective and quantifiable standard of substantial 
use.'' One commenter stated that while the demonstrated use requirement 
``may impede innovation,'' the Enterprise pilot programs could engage 
``untested'' credit scores.
3. Rationale for Final Rule
    The final rule requires an applicant to demonstrate use of the 
credit score by creditors to make credit decisions. The final rule does 
not establish a standard for meeting the demonstrated use component, 
but permits an Enterprise to address criteria for demonstrating use in 
its Credit Score Solicitation. FHFA acknowledges that requiring credit 
score models to demonstrate use in making credit decisions may limit 
the number of applications submitted to the Enterprises. This concern 
is partially addressed by the final rule provision permitting pilot 
programs. The availability of pilot programs will be an essential 
vehicle for new credit scores to demonstrate their performance history. 
The provisions related to pilot programs are discussed in more detail 
below.

H. Options for Evaluating Accuracy Test Results

    A credit score model is accurate if it produces a credit score that 
appropriately reflects a borrower's propensity to repay a mortgage loan 
in accordance with its terms, permitting a credit score user to rank 
order the risk that the borrower will not repay the obligation in 
accordance with its terms relative to other borrowers. The accuracy 
standard is measured by statistical testing. The final rule adopts a 
transitional approach to evaluating the results of the statistical 
testing.
    Under the transitional approach, one standard for accuracy would be 
applied to the initial Credit Score Assessment undertaken by an 
Enterprise, and another standard would be applied to subsequent Credit 
Score Assessments in response to a future solicitation. The 
transitional approach will require the Enterprises to apply the same 
standard to all applications received in response to the initial 
solicitation. This transitional approach will permit an Enterprise to 
assess the score currently in use, Classic FICO, pending a 
determination on any other applications received by the Enterprise in 
response to the initial Credit Score Solicitation.
1. Proposed Rule
    FHFA proposed four options for evaluating credit score accuracy 
test results in the Credit Score Assessment: A comparison approach, a 
champion-challenger approach, a benchmark-based approach, and a 
transitional approach. The four options reflect different approaches 
for comparing the statistical results from the credit score models 
being evaluated. The comparison approach would require an Enterprise to 
consider the credit score accuracy results of the new model(s) but 
would not establish a bright-line standard. The champion-challenger 
approach would require that the accuracy of the new credit score exceed 
the accuracy of the credit score(s) that are in use by the Enterprises. 
The benchmark approach would require all applicants to meet or exceed a 
benchmark established by regulation or by FHFA notice. The transitional 
approach would apply one of the above approaches to the initial 
solicitation and apply a different approach to subsequent evaluations.

[[Page 41895]]

2. Comments Received
    A majority of the commenters who addressed the four options in the 
proposed rule supported some variation of the transitional approach. 
The primary rationale provided by commenters to support the 
transitional approach was that the transitional approach would allow 
for the validation and approval of Classic FICO in the initial Credit 
Score Assessment. Some commenters recommended that the Enterprises 
immediately validate and approve Classic FICO, while one commenter 
stated that Classic FICO should be reviewed under the same process used 
for any other credit score model.
    Some commenters noted that Classic FICO has been tested by virtue 
of its use across the industry and within Enterprise systems for many 
years. These commenters stated that the Enterprises should be able to 
validate and approve Classic FICO consistent with this final rule on an 
expedited basis. One commenter stated that ``regardless of the option 
that is adopted in the final rule, FHFA and the Enterprises should 
validate and approve Classic FICO immediately rather than require the 
model to undergo the lengthy process envisioned in the proposed rule. 
Such a step would significantly reduce transition uncertainty for 
market participants and ensure that there are no market disruptions 
prior to the approval of any new models (including new models developed 
by FICO).''
    Most of the commenters that addressed the other options in the 
proposed rule recommended that they be used in combination with the 
transitional approach. A few commenters supported a standalone 
champion-challenger approach, stating that it would provide a clear 
standard for approval. Some commenters supported the comparison 
approach as a means of ensuring that the credit score models currently 
in use could meet the standard. Several other commenters opposed the 
comparison approach, stating that it would provide too much discretion 
and therefore would lack transparency. Similarly, most of the 
commenters that addressed the benchmark approach opposed it due to 
uncertainty about how the benchmark would be set.
3. Rationale for Final Rule
    FHFA agrees that there are benefits to the industry to validate and 
approve the score currently in use, Classic FICO, while also applying a 
fair and rigorous validation and approval process for all credit score 
model applications. The final rule provides that all credit score 
models must meet the same criteria for validation and approval. 
However, FHFA recognizes that the long use and widespread industry 
acceptance of Classic FICO may allow an Enterprise to accelerate the 
validation and approval process for this model.
    The final rule adopts the transitional approach because it offers 
the smoothest transition from the current use of Classic FICO to any 
new credit score model. Section 310 permits an Enterprise to continue 
to use the current credit score model until November 20, 2020. The 
transitional approach will abate the risk of the Enterprises failing to 
validate and approve a credit score model under the final rule before 
this date.
    Under the transitional approach, the standard for accuracy in the 
initial Credit Score Assessment will be different from the standard for 
accuracy in subsequent Credit Score Assessments. For the initial Credit 
Score Assessment, a champion-challenger approach would be problematic 
due to the lack of a validated and approved credit score to serve as 
the champion. Multiple commenters suggested instead setting a benchmark 
threshold based on the performance of Classic FICO for the initial 
Credit Score Assessment.
    The final rule requires the Enterprises to establish a credit score 
accuracy benchmark for the initial Credit Score Assessment. FHFA 
expects that the accuracy benchmark for the initial Credit Score 
Assessment will be informed by the accuracy of the credit score model 
currently used by the Enterprises, Classic FICO. Establishing a 
benchmark informed by Classic FICO is appropriate because the model has 
been used by the Enterprises and the mortgage finance industry for more 
than 12 years. In addition, FHFA has found the Classic FICO score to be 
a reasonable measure of default risk for the Enterprises' internal 
purposes. The Enterprises will publish the accuracy benchmark for the 
initial Credit Score Assessment in the initial Credit Score 
Solicitation.
    This approach to setting an accuracy benchmark for the initial 
Credit Score Assessment will permit an Enterprise to validate and 
approve Classic FICO while continuing to evaluate other credit score 
models for which it receives applications in response to the initial 
Credit Score Solicitation. If an Enterprise validates and approves 
Classic FICO and then validates and approves another credit score 
model, the Enterprise may replace Classic FICO with the newly validated 
and approved credit score model.
    The final rule adopts a credit score accuracy standard for Credit 
Score Assessments in response to future solicitations that will be 
based on the validated and approved credit score model(s) in use at 
that time. This is equivalent to the champion-challenger approach where 
the applicant's ``challenger'' credit score model must be more accurate 
than the ``champion'' credit score model that is in use. One commenter 
suggested adding an accuracy improvement margin such that the 
applicant's credit score would have to be more accurate than the 
existing credit score by a threshold.
    Considering the implementation costs associated with introducing a 
new credit score into the mortgage marketplace, requiring an 
improvement in accuracy is reasonable. However, establishing such a 
threshold in the final rule could provide less flexibility to the 
Enterprises. An Enterprise may consider the relative accuracy of 
different credit score models as part of the Enterprise Business 
Assessment, including whether any improvement is sufficient to justify 
the costs and benefits associated with adoption of a new credit score 
requirement.
    Several commenters mentioned the known testing bias where new 
credit scores will seem more accurate than legacy credit scores, when 
in fact they are not more accurate. In the absence of a simple solution 
to abate the statistical bias, some commenters recommended requiring 
new credit score models exceed the accuracy of the existing credit 
score model. An alternative viewpoint expressed by two commenters was 
that requiring an applicant's credit score to be equally as accurate as 
the current credit score model in use would enable more credit score 
models to pass the Credit Score Assessment and be evaluated in the 
Enterprise Business Assessment phase.
    One commenter stated that credit score models that pass the Credit 
Score Assessment may have greater credibility in the market. However, 
it is important to note that the Credit Score Assessment is only one 
step of the overall validation and approval process. When an 
application passes the Credit Score Assessment, an Enterprise has 
determined that a credit score meets the minimum testing criteria for 
the limited purpose of the Credit Score Assessment. The statistical 
results of the Credit Score Assessment should not be extrapolated 
beyond these minimum testing criteria. The Credit Score Assessment does 
not evaluate the appropriateness of a credit score model for any other 
purposes, and

[[Page 41896]]

an Enterprise determination as part of the Credit Score Assessment 
should not be viewed as an endorsement of the credit score model.

I. Assessment of Impact on Enterprise Operations and Risk Management, 
and Impact on Industry

    The proposed rule would have required that the Enterprise Business 
Assessment include a cost-benefit analysis of the potential operational 
impact on industry and borrowers of using a particular credit score 
model. FHFA received a number of comments raising concerns with the 
potential cost and time required for an extensive cost-benefit 
analysis, with some commenters concerned that the cost of this analysis 
would be shifted to applicants through excessive upfront or assessed 
fees. The final rule does not make any change to the proposed 
provisions on application fees or cost-benefit analysis. Under the 
final rule, the Enterprise is responsible for conducting the Enterprise 
Business Assessment, which includes a cost-benefit analysis. The final 
rule does not permit an Enterprise to assess an applicant for the costs 
of this analysis beyond the upfront application fee and any assessment 
for third-party data acquisition costs. The final rule also provides 
that the cost-benefit analysis must be completed within the 240 days 
allotted for completing the Enterprise Business Assessment.
1. Proposed Rule
    Under the proposed rule, the Enterprise Business Assessment 
included an evaluation of the impact that using the applicant's credit 
score model would have on Enterprise operations (including any impact 
on purchase eligibility criteria and loan pricing) and risk management 
(including counterparty risk management), in accordance with standards 
and requirements related to prudential management and operations and 
governance set forth in other FHFA regulations.\4\
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    \4\ See 12 CFR part 1236 and 1239.
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    The Enterprise Business Assessment would evaluate the impact of 
using the applicant's credit score model on mortgage industry 
operations and mortgage market liquidity, including costs associated 
with implementation of a newly approved credit score model. This 
evaluation also would consider whether the benefits of using credit 
scores produced by that model can reasonably be expected to exceed the 
costs. Consideration of the costs and benefits would include 
implementation and ongoing costs, projected benefits and costs to the 
Enterprises and borrowers, as well as potential impacts on market 
liquidity and the cost and availability of credit.
2. Comments Received
    Many commenters addressed the cost-benefit analysis in the 
Enterprise Business Assessment. Commenters generally were in favor of 
the proposed cost-benefit analysis in the Enterprise Business 
Assessment. Several commenters cited the importance of this provision 
as part of prudent decision-making practices. Other commenters 
supported the provision but suggested changes, stating that the 
provision was too vague and should explicitly require engagement with 
industry stakeholders to seek input on industry costs.
    Some commenters were concerned that the Enterprises would have an 
unlimited amount of time to conduct the cost-benefit analysis and that 
the costs of such an analysis would be borne by the applicant. One 
commenter suggested that the cost-benefit analysis should be made 
public, either through making the raw data from the Enterprises' 
analysis available or in the form of an Enterprise white paper.
    Several commenters, including associations representing smaller 
lenders, expressed concern that replacement of a credit score model, or 
the use of multiple credit score models at the same time, would present 
significant lender implementation costs which might especially impact 
smaller lenders. The commenters noted that those costs may not be worth 
the benefits of a new credit score model, especially given the higher 
expected costs associated with the use of multiple credit score models.
3. Rationale for Final Rule
    The proposed rule included the requirement for a cost-benefit 
analysis in the Enterprise Business Assessment, which was limited in 
time and scope. The final rule adopts the cost-benefit analysis 
provision as proposed. The final rule requires the cost-benefit 
analysis to evaluate the impact of using the credit score model on 
industry operations and mortgage market liquidity, including costs 
associated with implementation of a newly approved credit score. 
Because the cost-benefit analysis is one element of the overall 
Enterprise Business Assessment, the cost-benefit analysis must be 
conducted within the 240-day timeframe for completing the Enterprise 
Business Assessment.
    The final rule provides that each applicant must pay an up-front 
application fee established by the Enterprise. This application fee is 
intended to cover the direct costs to the Enterprise of conducting the 
Credit Score Assessment. An Enterprise also may assess an applicant for 
the cost of obtaining third-party data and credit scores necessary for 
testing purposes. The Enterprises are responsible for any costs 
associated with the Enterprise Business Assessment.
    Finally, the final rule does not make changes in response to 
comments recommending that the rule be more explicit about engaging 
with industry stakeholders. FHFA expects that the Enterprises will 
engage with industry stakeholders if necessary to complete the cost-
benefit analysis. For example, an Enterprise may consider the need for 
mortgage insurers to update and submit their premium rate sheets to 
state insurance regulators for approval, as well as the need for MBS 
and CRT investors to re-estimate mortgage performance and valuation 
models.

J. Competitive Effects

    As discussed above, the final rule does not include the proposed 
conflicts-of-interest certification, which would have required 
independence of a credit score model developer from any data provider. 
However, the final rule still includes an evaluation of competitive 
effects as one component of the Enterprise Business Assessment. This 
will allow an Enterprise to consider whether using a particular model 
would promote or discourage competition in the industry.
1. Proposed Rule
    The proposed rule would have required the Enterprise Business 
Assessment to include an evaluation of whether using the applicant's 
credit score model could have an impact on competition in the industry. 
This evaluation would consider whether use of a particular credit score 
model could have an impact on competition due to any ownership or other 
business relationship between the credit score model developer and any 
other institution.
2. Comments Received
    FHFA received numerous comments on the proposed competition 
provisions. As previously discussed, many commenters opposed the 
conflicts-of-interest certification requirement in the application, and 
FHFA is eliminating the requirement for an applicant to certify its 
independence as a component of the application. However, many 
commenters also suggested that it is appropriate for an Enterprise to 
consider whether using a particular credit score

[[Page 41897]]

model may have competitive effects on the industry--positive or 
negative--during an Enterprise Business Assessment.
    These commenters supported addressing competition as part of the 
rulemaking and the Enterprise evaluations, with some commenters 
believing that ``that increased market competition in the credit-score 
industry could be beneficial to both consumers and lenders because it 
can improve efficiency, decrease pricing, and potentially expand the 
market of consumers for mortgage products.'' Other commenters expressed 
concerns about vertical integration and about the lack of other 
participants in the credit score market.
3. Rationale for Final Rule
    The final rule adopts the provision requiring the Enterprise 
Business Assessment to include consideration of the potential impact 
selection of a credit score could have on competition. An Enterprise 
may consider whether using a particular credit score model would 
contribute to consolidation or vertical integration. This type of 
evaluation is not unusual for the Enterprises. In the normal course of 
business, an Enterprise may consider the potential impact on 
consolidation as part of its review of third-party providers. For 
example, the Enterprises consider consolidation risk when doing 
business with servicers, sub-servicers, counterparties, vendors, and 
third-party providers. A similar evaluation is appropriate for the 
review of competitive effects in the market for credit score model 
developers.
    An assessment of competitive effects is just one component of the 
broader Enterprise Business Assessment. Overall, the Enterprise 
Business Assessment requires the Enterprises to consider multiple 
factors including, but not limited to, review of fair lending impacts, 
impact on risk management, and assessment of the credit score model 
developer as a third-party provider. FHFA expects that an Enterprise's 
review of competitive effects will be considered in conjunction with 
all other criteria established for the Enterprise Business Assessment.

K. Pilot Programs

    Section 310 requires that a credit score model have a historical 
record of measuring and predicting default rates and other credit 
behaviors. This could pose a challenge for newer credit scores. The 
proposed rule would have allowed for the Enterprises to use pilot 
programs for credit scores as a way for the Enterprises to evaluate and 
track performance of potential new credit scores with minimal 
disruption. Comments were supportive of the proposed provision on pilot 
programs, which the final rule adopts, with some clarifications.
1. Proposed Rule
    The proposed rule would have permitted the Enterprises to engage in 
pilot programs to learn about credit score models. Such pilot programs 
would balance the section 310 requirement that a credit score model 
have ``a historical record of measuring and predicting default rates 
and other credit behaviors'' with desirable innovation in credit score 
models. A pilot program could assist an Enterprise in determining the 
appropriate standards and criteria for a Credit Score Solicitation, 
including requirements for applications from credit score model 
developers.
    The proposed rule would have required FHFA to review and approve 
any credit score pilot of an Enterprise, and the proposed rule would 
have permitted FHFA to impose terms, conditions, and limitations as it 
deemed appropriate. Pilot programs generally would be of limited 
duration and scope. This would reinforce the ``test and learn'' nature 
of a pilot program and would ensure consistency with section 310's 
requirement that any score used by an Enterprise be validated and 
approved.
2. Comments Received
    All of the commenters that addressed pilot programs supported 
allowing the Enterprises to engage in pilot programs and other testing 
initiatives. One commenter stated that ``[t]his is perhaps the most 
important provision in the proposed rule. And it will be the provision 
with the most long-lasting impact in terms of encouraging innovation 
and progress,'' if new scoring models are able to help ``thin'' or 
``no-file'' consumers and expand access to mortgage credit without 
increasing risk. Another commenter stated that ``[t]he pilot program 
process that [FHFA proposed] for new scoring models in the rule is 
exactly the right approach to encourage and promote innovation, 
competition and the use of true alternative data and alternative 
methods,'' and that pilots should be encouraged rather than just 
permitted. Other commenters agreed that pilots would be consistent with 
the intent of section 310, which they described as encouraging 
competition among and innovation by credit score model developers. 
Several commenters noted that pilots could be helpful in advancing the 
use of alternative data such as rental, utility, and telecommunications 
data, as well as consumer-permissioned data such as depository data.
    Several commenters suggested types of pilots that might be 
beneficial. One commenter suggested that the Enterprises could conduct 
a pilot on ``a subset of borrowers that did not have a credit score and 
were manually underwritten by the Enterprises to assess how well a new 
credit score predicts the propensity of these borrower to repay their 
mortgages.'' Another commenter suggested pilot programs ``for new 
models that go beyond conventional minimum scoring criteria'' to score 
consumers new to credit (those whose credit files show no accounts that 
have been opened for six or more months), consumers who may be 
``involuntarily inactive'' and have derogatory information such as a 
past delinquency on file, and consumers who are voluntarily inactive. 
Pilot programs for credit score models that use alternative data could 
demonstrate whether future models using such data would be able to 
accurately and inclusively score a larger portion of the population.
    Several commenters suggested that the final rule provide for 
transparency and public awareness of pilot programs. One commenter 
suggested FHFA publicly report on new pilots and the results of pilots 
while another suggested FHFA ``maximize'' transparency by regularly 
informing the public of approved pilots, publicly sharing the results 
from pilots, and providing the public information about Enterprise and 
FHFA actions that follow pilots. Similarly, another commenter suggested 
that the terms of pilots should be transparent, limitations on duration 
and scope should be made publicly available, and that the public should 
be provided information on the types of institutions participating in 
the pilot and the qualitative and quantitative metrics for evaluating 
pilots.
    One commenter suggested that requirements for implementing a pilot 
be less restrictive and time intensive than the proposed credit score 
model validation and approval process. Another commenter suggested that 
all pilot program applicants be assessed and compared against each 
other, considering that there would be no incumbent or benchmark credit 
score model to use for comparison. That commenter also noted that 
pilots should include model testing across the populations and market 
conditions they are intended to address.

[[Page 41898]]

    Some commenters also addressed transitioning from a pilot program 
to wider use of a validated and approved credit score, with one 
commenter suggesting that a model that successfully completes a pilot 
program then be eligible to undergo a Credit Score Assessment and 
another suggesting that FHFA provide clear guidance about how a credit 
score model would transition from a pilot program to the full 
validation and approval process to full implementation by the 
Enterprises.
3. Rationale for Final Rule
    To promote public awareness and transparency, FHFA intends to apply 
as much of the credit score validation and approval process established 
by this final rule as is appropriate, considering the nature of any 
pilot programs that may be considered by an Enterprise. For example, 
FHFA anticipates that the Enterprises may solicit applications for 
pilot programs. A solicitation for pilot programs would include much of 
the same information as a Credit Score Solicitation. Because of the 
potentially wide variation among pilot programs, the final rule does 
not restrict the ability of FHFA or the Enterprises to vary the 
requirements for a pilot program solicitation based on the specific 
pilot program in question.
    The final rule requires that an Enterprise must submit any pilot 
program to FHFA for review and approval. An Enterprise may submit a 
proposed pilot program at any time, regardless of whether FHFA has 
initiated a solicitation period for all applicants. FHFA may impose 
terms, conditions, or limitations on the pilot program to ensure that 
it clearly addresses any regulatory requirements that a pilot applicant 
is required to meet and any other Enterprise standards and criteria.
    To address concerns that pilots might be perceived as 
``exceptions'' to the full regulatory validation and approval process, 
the final rule provides that each pilot program will be subject to 
limits on the duration and scope of the pilot. The final rule allows 
FHFA to extend the duration of a pilot for good cause shown.
    FHFA acknowledges the interest commenters expressed in making 
information about pilots publicly available. FHFA expects to assess 
publication of information about pilot programs in the context of the 
review and approval process for pilots.

IV. Other Comments Received

    This section addresses comments on other significant topics, 
including themes outside the scope of this rulemaking.

A. Lender Choice

    Some commenters suggested that the final rule permit lenders to 
select the credit score used to underwrite a mortgage for delivery to 
an Enterprise. While the concept of lender choice was one of four 
approaches on which FHFA requested input from the public in the 2017 
Credit Score RFI, this issue is outside the scope of this rulemaking. 
As stated previously, the final rule does not address how multiple 
approved credit score models would be implemented.

B. Tri-Merged Credit Report

    The Enterprises have long required a tri-merged credit report, 
pursuant to which lenders are required to purchase credit scores and 
credit reports from all three CRAs. Several commenters noted that 
competition could be encouraged among the CRAs if the Enterprise 
requirement for a tri-merged report was eliminated. While FHFA stated 
in the 2017 Credit Score RFI that changes to the tri-merged report are 
under consideration, the tri-merged report requirement is outside the 
scope of this rulemaking.
    While FHFA may at some point review and evaluate changing the 
requirement of lenders to purchase credit reports and scores from all 
three CRAs, FHFA and the Enterprises would need to fully understand the 
costs and benefits before making any change to the tri-merge 
requirement. FHFA aims to simplify and reduce costs associated with 
mortgage origination and the acquisition process, while ensuring the 
Enterprises manage their credit risk exposure appropriately.

C. Encourage New Credit Data Repositories

    One commenter stated that FHFA should encourage the creation of 
additional credit data repositories. The commenter suggested that one 
mechanism for encouraging such new entrants would be to require the 
Enterprises to sell mortgage payment data to any new credit data 
repositories. While FHFA supports competition in the credit data and 
credit score industry generally, the specific steps recommended by the 
commenter are outside the scope of this rulemaking.

D. Use of Nontraditional Consumer Credit Data

    Several commenters supported the use of consumer credit data that 
is not traditionally found in the CRAs. FHFA agrees with commenters on 
the potential benefits of using nontraditional data, such as data on 
payment of rent, utility data, or telecommunications data. The 
Enterprises currently consider alternative housing-related data such as 
rental payments or utility payments where available. However, the use 
of nontraditional consumer credit data is outside the scope of this 
rulemaking.

E. Transparency/Release of Information

    Several commenters suggested that FHFA or the Enterprises make 
additional disclosures of information if and when a new credit score 
model is to be implemented. These commenters requested that FHFA or the 
Enterprises disclose the criteria for, and the results of, any cost-
benefit analysis of a new credit score model, and also that 
comprehensive data be disclosed so the market can understand the impact 
of a new credit score model. The commenters stated that this type of 
transparency will increase confidence in the new credit score model.
    Although a discussion of implementation is outside the scope of 
this rulemaking, FHFA acknowledges the importance of public 
understanding of the impact of, and confidence in, any new credit score 
model. FHFA and the Enterprises will consider how to facilitate public 
understanding of any new credit score model, including the potential 
sharing of non-proprietary information, at the time a new credit score 
model is approved.

F. Request for Enterprises To Provide Raw Credit Score Data

    Some commenters requested that the Enterprises provide access to 
the historical loan-level data and credit scores used for the empirical 
testing of credit scores conducted by FHFA and the Enterprises from 
2015 to 2018 pursuant to FHFA's Conservatorship Scorecards. FHFA 
received similar requests in response to the 2017 Credit Score RFI. 
While the data used for that empirical testing has not been made 
public, Enterprises make available to the public several other loan-
level data sets that include credit scores.
    The final rule does not require the Enterprises to make data 
available to industry or the public for parallel testing. The data used 
for empirical testing of credit scores is generally proprietary data 
that may be costly to obtain and may be subject to restrictions on 
further sharing. Industry participants are encouraged to work with the 
credit score model developers and CRAs to acquire any data needed to 
update their internal models or to conduct parallel testing of credit 
score models.

[[Page 41899]]

G. Consider Enterprise Mission

    While several commenters noted the Enterprises' public mission, one 
commenter requested that FHFA revise its proposal on the Enterprise 
Business Assessment to require consideration of the positive effect a 
model could have on expanding the universe of creditworthy borrowers 
and potential homebuyers, as an offsetting factor to the cost of 
adopting and implementing that model. FHFA believes this sentiment is 
already reflected in the final rule, which requires the Enterprises to 
consider potential benefits to borrowers, including benefits related to 
cost and availability of credit. FHFA also interprets its regulations, 
and expects the Enterprise to implement them, with full awareness of 
other statutory duties that may be implicated, including duties related 
to Enterprise safety and soundness, acting consistently with the public 
interest, support of mortgages for low- and moderate-income families, 
and compliance with fair lending laws. Consequently, FHFA does not 
believe the requested change is necessary.

H. Consider Eliminating LLPAs and Delivery Fees

    Some commenters noted that consumers with lower credit scores are 
more likely to be subject to higher LLPAs and Delivery Fees and thus 
may pay more for credit. One commenter noted that consumers with lower 
credit scores are disproportionately likely to have low or moderate 
incomes or to be minorities. The commenter stated that LLPAs and 
Delivery Fees could reduce access to credit for such consumers and 
suggested eliminating LLPAs and Delivery Fees on that basis.
    LLPAs and Delivery Fees are used by the Enterprises to compensate 
for the credit risk of a mortgage loan. To the extent that credit 
scores are used in setting the LLPAs and Delivery Fees, the final rule 
requires that the credit scores be produced from validated and approved 
models. As other commenters have expressed, innovation in credit score 
models could result in improved understanding of borrower 
creditworthiness that may result in reduced cost of credit for some 
borrowers. However, the question of establishing specific requirements 
for Enterprise loan pricing (including LLPAs and Delivery Fees) is 
outside the scope of this rulemaking.

I. Discontinue the Rulemaking

    One commenter stated that the proposed rule is a waste of taxpayer 
dollars. The commenter urged FHFA to discontinue the rulemaking process 
and to go back to Congress to gain additional guidance. However, 
section 310 requires FHFA to establish standards and criteria for the 
validation and approval of credit score models. This final rule meets 
that statutory obligation.

V. Section-by-Section Analysis of Final Rule

A. Purpose and Scope, Definitions, and Computation of Time--Sec. Sec.  
1254.1, 1254.2 and 1254.3

    Section 1254.1 of the final rule sets out the purpose of the final 
rule, to establish the standards and criteria that an Enterprise must 
satisfy in creating a process for the validation and approval of credit 
score models. Section 1254.1 of the final rule also describes the four 
major components of the validation and approval process.
    Section 1254.2 of the final rule defines key terms used in the 
regulation. The definitions distinguish between a ``credit score'' and 
a ``credit score model.'' As defined in the final rule, a ``credit 
score'' is a numerical value that is derived from a statistical tool or 
model, while a ``credit score model'' is the statistical tool or model 
itself. Consistent with section 310, the definition of ``credit score 
model'' is limited to models created by third parties. In other words, 
``credit score model'' does not include any statistical tool or model 
created by an Enterprise, such as an AUS. The final rule defines a 
``credit score model developer'' as any person with ownership rights in 
the intellectual property of a credit score model.
    The proposed rule would have defined ``nationwide consumer 
reporting agency'' consistent with the definition in the Fair Credit 
Reporting Act (15 U.S.C. 1681a). The final rule omits this definition 
because the term is not used in the regulation.
    Section 1254.3 of the final rule clarifies how time periods will be 
measured for the various requirements and deadlines set forth in the 
final rule.

B. Enterprise Use of Credit Scores--Sec.  1254.4

    Section 1254.4 of the final rule provides that an Enterprise is not 
required to use a credit score for any business purpose. However, if an 
Enterprise requires a credit score as a condition of purchasing a 
mortgage, the credit score must be produced by a credit score model 
that has been validated and approved in accordance with the final rule. 
As discussed in more detail above, the final rule permits an Enterprise 
to use credit scores that are subject to a limited pilot program being 
conducted by the Enterprise in accordance with the final rule.
    Section 1254.4 of the final rule also provides that an Enterprise 
may replace any validated and approved credit score with any other 
validated and approved credit score. The proposed rule would have 
provided that such replacement was at the discretion of the Enterprise. 
However, as discussed in more detail above, the final rule provides 
that an Enterprise must submit any proposed determination to FHFA for 
review and approval. This prior approval requirement applies to any 
proposed determination to replace one credit score model with another, 
and so the final rule omits the phrase indicating that replacement is 
at an Enterprise's discretion. However, the final rule still provides 
that use of a credit score model by an Enterprise does not create any 
expectation of or right to continued use of that credit score model.

C. Enterprise Solicitation of Applications From Credit Score Model 
Developers--Sec.  1254.5

    The final rule addresses the solicitation process, the minimum 
required contents of an Enterprise solicitation, and details and timing 
of the review of Enterprise proposed solicitations by FHFA prior to 
Enterprise publication. The final rule establishes that the 
solicitation process involves: (1) A notice from FHFA to the 
Enterprises that FHFA has determined that the Enterprises must 
undertake a solicitation; (2) development of a Credit Score 
Solicitation by each Enterprise; (3) review and approval of the Credit 
Score Solicitation by FHFA; (4) publication of the Credit Score 
Solicitation by the Enterprise; and (5) the time period during which 
the Enterprises will accept applications for validation and approval of 
credit score models. Each step is addressed below.
1. Solicitation Process Initiated by FHFA
    Section 1254.5(a) of the final rule permits FHFA to require the 
Enterprises to solicit applications from credit score model developers 
for the review and approval of the credit score model by an Enterprise. 
FHFA will determine in its discretion whether to open a solicitation 
for credit score model developers to apply for consideration.
    FHFA may open a solicitation at its own initiative or based on a 
request from an Enterprise or any other party. Such requests may be 
based on a reasonable belief on the part of an Enterprise or interested 
party that a new score has the potential to be materially

[[Page 41900]]

beneficial to the mortgage market and merits earlier consideration. In 
determining the need for future solicitations, FHFA will consider 
potential benefits of updating the credit score model requirements and 
the costs to industry of changing from one credit score model to 
another, and whether an update to the credit score model could be 
achieved by an enhancement to an Enterprise AUS. For example, FHFA may 
determine there is no need to open a solicitation in the future because 
an Enterprise no longer conditions mortgage purchases on the provision 
of a credit score.
    Section 1254.5(a) of the final rule also provides that FHFA will 
notify an Enterprise of the requirement to solicit applications. The 
notice will state when the Enterprise must begin soliciting 
applications, the deadline for an Enterprise to submit its proposed 
Credit Score Solicitation to FHFA, and the length of time the 
solicitation period is open. Each Enterprise is required to submit a 
``Credit Score Solicitation'' to FHFA for review and approval in 
response to an FHFA initiated solicitation.
    The final rule does not require an Enterprise to consider any 
application that is received outside of a solicitation established by 
FHFA. An Enterprise could review and conduct preliminary empirical 
analysis if an application is received outside of a particular 
solicitation, and this analysis could prompt an Enterprise to request 
that FHFA open a solicitation. However, an Enterprise would not be 
permitted to approve an application that was not submitted in response 
to a solicitation.
2. Required Content of a Credit Score Solicitation
    Section 1254.5(b) of the final rule requires that a ``Credit Score 
Solicitation'' must cover the Enterprise's validation and approval 
process, including the requirements that an application must meet in 
order for a credit score model to be considered by an Enterprise. The 
final rule permits the Enterprises to establish requirements in 
addition to those set forth in the rule.
    Specifically, the final rule requires each Credit Score 
Solicitation to provide the opening and closing dates of the period 
during which applications will be accepted, describe information that 
must be included in each application, and describe the process by which 
the Enterprise will obtain data for assessing applicants' credit score 
models. The Credit Score Solicitation must describe the Enterprise 
validation and approval process, including the processes for the Credit 
Score Assessment and the Enterprise Business Assessment. The process 
must be in accordance with the minimum standards and criteria of 
section 310 and the final rule. For example, the Credit Score 
Solicitation must address the standards or criteria for accuracy, 
reliability, and integrity, and any method of demonstrating that the 
credit score has a historical record of measuring and predicting credit 
behaviors, including default rates, as required by section 310.
    The final rule establishes minimum standards and criteria for 
validation and approval of credit score models. An Enterprise may have 
valid business reasons for imposing additional standards and criteria. 
Section 310 and the final rule both permit additional standards and 
criteria to be imposed by an Enterprise. Any additional standards, 
criteria, or requirements must be included in the Credit Score 
Solicitation, and are subject to FHFA review and approval.
3. FHFA Review of Enterprise Solicitation
    Section 1254.5(c) of the final rule requires FHFA to review and 
approve or disapprove each Credit Score Solicitation submitted by an 
Enterprise, including any Credit Score Solicitations submitted jointly 
by the Enterprises. The final rule requires an Enterprise to submit a 
Credit Score Solicitation for FHFA review prior to the start of the 
solicitation period. FHFA may object to any additional Enterprise 
standards, criteria, or requirements, or impose any terms, conditions, 
or limitations that FHFA determines appropriate. The final rule 
establishes a 45-day period for FHFA to complete its review, which may 
be extended by FHFA if necessary.
    Because the Credit Score Solicitation must describe the Enterprise 
validation and approval process, FHFA's review of each Credit Score 
Solicitation meets the statutory requirement that FHFA ``periodically'' 
review the Enterprise validation and approval process.\5\ This review 
does not prevent FHFA from reviewing an Enterprise's validation and 
approval process as part of its usual supervisory processes, including 
examinations.
---------------------------------------------------------------------------

    \5\ 12 U.S.C. 1454(d)(8) and 1717(b)(7)(H).
---------------------------------------------------------------------------

4. Publication of Credit Score Solicitation
    Section 1254.5(d) of the final rule provides that after receiving 
approval of the Credit Score Solicitation from FHFA, the Enterprise 
must make publicly available the Credit Score Solicitation for at least 
90 days prior to the start of the solicitation time period. This will 
provide prospective applicants time to consider whether to submit an 
application for review. In particular, the 90-day publication period 
will provide applicants a reasonable period to review the fees and the 
information required to complete an application prior to expending 
resources to submit an application. The publication of the Enterprise 
Credit Score Solicitation satisfies section 310's requirement that an 
Enterprise ``make publicly available'' a description of its validation 
and approval process.
5. Timeframes for Solicitation
    Section 1254.5(a) provides that the solicitation period will be 
determined by FHFA. Based on comments received, FHFA wants to ensure 
that the Enterprises are accepting applications concurrently. 
Therefore, FHFA expects to require each Enterprise to publish its 
Credit Score Solicitation on the same date. Section 1254.5(e) of the 
final rule requires that each Enterprise submit its Credit Score 
Solicitation for the initial solicitation within 60 days of the 
effective date of the final rule. The initial solicitation time period 
will begin on a date determined by FHFA and will extend for 120 days. 
For future solicitation time periods, FHFA will review the Credit Score 
Solicitations submitted by the Enterprises and consider the appropriate 
length of time the solicitation window should be open.

D. Submission and Initial Review of Applications--Sec.  1254.6

1. Overview
    Section 1254.6 of the final rule establishes the minimum criteria 
an application must meet to be considered complete, including: (1) An 
application fee; (2) a fair lending certification; (3) information to 
demonstrate use of the credit score model by the lending industry; (4) 
information on the qualifications of the credit score model developer; 
and (5) any other information required by an Enterprise in the Credit 
Score Solicitation. The final rule also addresses submission of 
applications, Enterprise determination of each application's 
completeness, notice to applicants of the status of the application as 
complete, and acquisition of historical consumer credit data by an 
Enterprise. Finally, the final rule establishes that an Enterprise is 
not required to evaluate any application that is not complete.
2. Application Fees and Enterprise Assessment for Costs
    Section 1254.6(a)(1) of the final rule requires each applicant to 
pay an

[[Page 41901]]

application fee that is intended to cover the direct cost to the 
Enterprise of the Credit Score Assessment. The final rule also permits 
an Enterprise to address conditions under which it would refund a 
portion of the application fee. Section 1254.6(b) of the final rule 
also permits an Enterprise to assess applicants for the costs 
associated with acquiring third-party data and credit scores, either in 
addition to or instead of an up-front application fee.
3. Fair Lending Certification and Compliance
    Section 1254.6(a)(2) of the final rule requires each applicant to 
address compliance of the credit score model and the credit scores it 
produces with federal fair lending requirements, and to certify that no 
characteristic used in the development of the credit score model or as 
a factor in the credit score model to produce credit scores is based 
directly on or is highly correlated solely with prohibited 
classifications, as defined by the Equal Credit Opportunity Act (15 
U.S.C. 1691(a)(1)), the Fair Housing Act (42 U.S.C. 3605(a)), and the 
Safety and Soundness Act (12 U.S.C. 4545(1)).
4. Demonstrated Use
    Section 1254.6(a)(3) of the final rule requires an applicant to 
demonstrate use of the credit score by creditors to make lending 
decisions. The final rule does not establish a standard for meeting the 
demonstrated use component, but permits an Enterprise to address 
criteria for demonstrating use in its Credit Score Solicitation. 
Enterprise criteria may include, for example, submissions of 
testimonials by lenders who use the applicant's credit score for 
underwriting credit.
5. Qualifications of Credit Score Model Developer
    Section 1254.6(a)(4) of the final rule requires each applicant to 
provide information on the qualifications of the credit score model 
developer, including a description of the developer's relevant 
experience, financial capacity, corporate structure (including 
relationships through common control or ownership), governance 
structure, and past financial performance. Each Credit Score 
Solicitation may also set forth other required information related to 
qualifications, in the Enterprise's discretion.
6. Additional Enterprise Standards and Criteria
    Section 1254.6(a)(5) of the final rule permits the Enterprises to 
establish additional requirements for applicants. Each Enterprise must 
include all application requirements in its Credit Score Solicitation, 
including requirements established by the Enterprise in addition to 
those established by the final rule.
7. Data Acquisition
    Section 1254.6(b) of the final rule permits an Enterprise to 
acquire any historical consumer credit data necessary to test the 
credit score model's record of measuring default rates and other credit 
behaviors. Such data typically include historical credit scores on a 
test set of existing Enterprise loans at origination. Applicants whose 
credit scores incorporate multiple sources of consumer credit 
information (e.g., credit scores based on information from the 
nationwide CRAs augmented with data outside of the three nationwide 
CRAs) will be required to work with the Enterprises on a process to 
obtain the applicant's credit scores on existing Enterprise loans. FHFA 
recognizes that information required from a third party, such as 
consumer credit data, may be beyond the control of the applicant. The 
final rule permits third parties to deliver information to an 
Enterprise within a reasonable time period that may extend beyond the 
120-day solicitation period. However, an application is not complete 
unless and until an Enterprise has received all the necessary data 
needed to undertake a Credit Score Assessment.
    As stated above, the final rule also permits an Enterprise to 
assess applicants for reasonable costs associated with the acquisition 
of third-party data and credit scores.
8. Completeness of Applications
    Section 1254.6(c) of the final rule requires the Enterprises to 
review each application that is submitted within the solicitation 
period. Within 60 days after the date of submission, the Enterprise 
must provide the applicant a status notice of the application. Each 
applicant will be responsible for submitting the documentation required 
within the timeframe imposed by the final rule. If the applicant needs 
to provide additional information in order for the application to be 
complete, the deadline for submitting that information is the close of 
the solicitation period. Required information from a third party, such 
as consumer credit data, may be submitted to an Enterprise after the 
close of the solicitation period.
    The final rule provides that an application is complete when an 
Enterprise determines that the required information has been received 
from the applicant and any third-party (i.e., any data requested from a 
third-party on behalf of the applicant for use by the Enterprise).
    The final rule establishes that an Enterprise has no obligation to 
assess any incomplete application. As required by section 310, each 
applicant will receive an application status notice informing the 
applicant of any additional information needed in conjunction with an 
application. If an Enterprise determines that an application is 
incomplete, the applicant would have the opportunity to respond within 
the designated 120-day solicitation period.
    The final rule does not require an Enterprise to consider any 
application that is received outside of a solicitation established by 
FHFA. An Enterprise could review and conduct preliminary empirical 
analysis if an application is received outside of a particular 
solicitation, and this analysis could prompt an Enterprise to request 
that FHFA open a solicitation. However, an Enterprise would not be 
permitted to approve an application that was not submitted in response 
to a solicitation.

E. Credit Score Assessment--Sec.  1254.7

1. Overview
    Section 1254.7 of the final rule requires each Enterprise to 
undertake a Credit Score Assessment of each credit score model for 
which it has received a complete application. The Credit Score 
Assessment includes an evaluation of the accuracy, reliability, and 
integrity of credit scores on a stand-alone basis (outside of an 
Enterprise's internal systems and procedures). The final rule addresses 
the standards or criteria for accuracy, reliability, and integrity for 
this purpose, and sets forth an accuracy standard for the initial 
Credit Score Solicitation to facilitate the transition to validated and 
approved credit score models. The final rule also addresses who may 
conduct such evaluations, and the timeframe in which the Credit Score 
Assessment must be completed.
2. Testing for Accuracy and Reliability
    Section 1254.7(b) of the final rule requires that the Enterprises 
conduct statistical testing that uses one or more industry standard 
statistical tests for demonstrating divergence among borrowers' 
propensity to repay, applied to mortgages purchased by an Enterprise. 
The final rule does not define specific parameters for the testing that 
would be conducted by an Enterprise for accuracy testing. Although the 
final rule allows flexibility for the Enterprises to define the 
specific parameters of testing, FHFA requires

[[Page 41902]]

that the Enterprise testing requirements include a common definition of 
default.
    The definition of default is critical to accuracy and reliability 
testing of a credit score. A definition of default includes two parts, 
the occurrence of an event (e.g., delinquency) and a time horizon 
(e.g., 24 months since origination). Currently, the generally accepted 
definition of default is a 90-day delinquency during a two year period. 
FHFA expects that the Enterprises will use the generally-accepted 
definition of default during the Credit Score Assessment. However, FHFA 
encourages the Enterprises to consider testing using other definitions 
in addition to the testing using the generally-accepted definition.
    FHFA requested comment on any additional default definitions. 
Commenters generally supported the proposed language and mentioned the 
benefits of the Enterprises using an aligned definition of default. One 
commenter indicated that the definition of default should be longer 
given that mortgages have long maturities. The predictive power of 
credit scores at origination declines as the mortgage ages beyond two 
years, while other factors like payment history and home equity (or 
LTV) increase in predictive power. While the aligned definition of 
default is reasonable, consistent with industry standard and consistent 
with how the Enterprises use credit scores, the Enterprises are 
encouraged to test longer performance windows.
    The final rule includes a requirement that the Enterprise test 
accuracy and reliability on subgroups of loans. The loan sets obtained 
for testing would have to contain sufficient observations to perform 
the tests on subgroups. It is unlikely that the accuracy of a credit 
score is constant across the entire credit score distribution. Subgroup 
testing could be applied to loan-to-value groups, credit score groups, 
and thin credit file loans at origination, as well as new credit files 
and files with a past delinquency. It is expected that credit score 
accuracy will decline when applied to thin, stale, and new credit 
files, yet the accuracy of credit score models is critically important 
to borrowers and investors for thin files because such credit scores 
will likely be close to current underwriting thresholds.
3. Accuracy Standard
    Section 1254.7(c)(1) of the final rule provides that a credit score 
model is accurate if it produces credit scores that appropriately 
reflect a borrower's propensity to repay a mortgage loan in accordance 
with its terms. An accurate credit score permits a credit score user to 
correctly rank order the risk that the borrower will not repay the 
obligation in accordance with its terms relative to other borrowers.
    The final rule requires an Enterprise to establish a credit score 
accuracy cutoff as a benchmark for the initial Credit Score Assessment. 
Applicants' credit scores must be as accurate as the benchmark in order 
to pass the Credit Score Assessment. FHFA expects that the benchmark 
for the initial Credit Score Assessment will be informed by the 
accuracy of the credit score in use today, Classic FICO.
    The final rule establishes that future Credit Score Assessments 
must use the validated and approved credit score models in use at the 
time the testing is conducted as the accuracy standard. Basing the 
benchmark on the most accurate validated and approved score in use at 
that time is equivalent to the champion-challenger approach where the 
applicant's credit score model (the ``challenger'') must be more 
accurate than the existing credit score model in use (the 
``champion'').
4. Reliability Standard
    Section 1254.7(c)(2) of the final rule establishes the reliability 
standard that must be met as part of the Credit Score Assessment. Under 
the reliability standard, a credit score model is reliable if it 
produces credit scores that maintain accuracy through the economic 
cycle. The final rule requires that an Enterprise evaluate whether a 
new credit score model produces credit scores that are at least as 
reliable as the credit scores produced by a credit score model that the 
Enterprise is then using, as demonstrated by appropriate testing.
    The final rule requires an Enterprise to test at least two sets of 
Enterprise loans to evaluate credit score reliability. The first group 
of loans would represent recently underwritten loans with sufficient 
performance history consistent with the definition of default. The 
second set of loans would be selected from a period earlier than the 
estimation data used to develop the new credit scores and at a point in 
the economic cycle different from the first loan group. The Enterprises 
would define the loan sets conditional on origination period (or 
acquisition period) and include all single-family loans within the 
specified periods.
5. Integrity Standard
    Section 1254.7(c)(3) of the final rule establishes a standard for 
integrity that must be met as part of the Credit Score Assessment. 
Under the integrity standard, a credit score model has integrity if, 
when producing a credit score, it uses relevant data that reasonably 
encompasses the borrower's credit history and financial performance. To 
be validated, a credit score model applicant would be required to 
demonstrate to the Enterprise that the model has integrity, based on 
appropriate evaluations or requirements identified by the Enterprise 
(which may address, for example, the level of aggregation of data or 
observable data that may not be omitted or discounted when constructing 
a credit score).
    One commenter recommended that the integrity standard in proposed 
Sec.  1254.7(b)(3) also provide that ``No credit score model may be 
eliminated from consideration based solely on the test for integrity, 
unless it clearly fails to meet the criteria set out by the Enterprise, 
but performance on this test may be considered as one factor in the 
overall Credit Score Assessment.'' FHFA recognizes that the integrity 
standard in the final rule is more subjective than the accuracy and 
reliability standards, which are based on statistical testing. However, 
determining whether particular data elements are relevant to the 
borrower's credit history and financial performance is necessarily a 
subjective determination. The additional language recommended by this 
commenter would not change the subjective nature of the determination 
and therefore the final rule does not include the suggested language. 
FHFA expects the Enterprises to apply the integrity standard based on 
their reasonable judgment of which data elements are necessary for a 
credit score model to consider.
    The integrity standard should be evaluated subjectively but 
consistently in the Credit Score Assessment. The goal of the standard 
is to ensure that the credit score model developer utilized available 
data elements that are relevant and legally permissible. Improvements 
in the range of consumer information available to credit score model 
developers may improve credit score accuracy. The integrity standard is 
designed to permit credit score model developers to innovate.
6. Additional Enterprise Standards and Criteria
    Section 1254.7(c)(4) of the final rule permits an Enterprise to 
establish additional requirements for the Credit Score Assessment. The 
Enterprise would be required to include any additional requirements in 
its Credit Score Solicitation, and those requirements would be subject 
to FHFA review and approval as discussed above.

[[Page 41903]]

7. Required Testing
    Section 1254.7(c) of the final rule permits an Enterprise to 
conduct its own testing for the Credit Score Assessment or to contract 
with a third party to test each credit score model. In addition, the 
Enterprises are permitted to jointly conduct the Credit Score 
Assessment for all complete applications received in response to a 
solicitation.
8. Timing and Notices
    Section 1254.7(d) of the final rule requires an Enterprise to 
provide a notice to each applicant that has submitted a complete 
application when an Enterprise will begin the Credit Score Assessment. 
The final rule provides that the Credit Score Assessment will begin no 
earlier than the close of the solicitation period unless FHFA 
determines that the assessment should begin on an earlier date. For 
example, FHFA may permit an Enterprise to begin a Credit Score 
Assessment prior to the close of the solicitation period if an 
Enterprise has concluded the application is complete, and the 
Enterprise has all the necessary data to begin a Credit Score 
Assessment.
    The final rule requires an Enterprise to complete the Credit Score 
Assessment period within 180 days. The final rule permits FHFA to 
authorize not more than two extensions of the Credit Score Assessment 
period that shall not exceed 30 days each, upon a written request and 
showing of good cause by an Enterprise.
    Section 1254.7(d) of the final rule also requires that an 
Enterprise notify an applicant if the application has passed the Credit 
Score Assessment. The final rule requires that this notification be 
provided no later than 30 days after the Enterprise has determined that 
the application has passed the Credit Score Assessment. If an 
application does not pass the Credit Score Assessment, the Enterprise 
would submit a proposed determination to FHFA as described in section 
1254.9.

F. Enterprise Business Assessment--Sec.  1254.8

1. Overview
    Section 1254.8 of the final rule requires Fannie Mae and Freddie 
Mac to independently undertake an Enterprise Business Assessment for 
each credit score model that the Enterprise determines has passed the 
Credit Score Assessment. The Enterprise Business Assessment must 
include: (1) An assessment of the accuracy and reliability of credit 
scores within the Enterprise underwriting and other systems; (2) an 
assessment of possible fair lending impacts of using the credit score 
within the Enterprise systems and processes that use credit scores; (3) 
an assessment of potential impacts on Enterprise operations and risk 
management, and impact on industry; (4) an assessment of possible 
competitive effects from using a particular credit score model; (5) an 
assessment of the credit score model provider as a potential third-
party provider; and (6) any other Enterprise standards and criteria. 
Because the Enterprises operate different systems, different business 
models, and different credit tolerances, the Enterprise Business 
Assessment requires each Enterprise to assess credit scores based on 
its specific business needs.
2. Accuracy and Reliability of Credit Scores Within Enterprise Systems
    Section 1254.8(b)(1) of the final rule requires an Enterprise to 
evaluate the accuracy and reliability of the credit score model when 
used within the Enterprise systems and processes. This evaluation must 
consider whether the credit score produced by an applicant's model is 
more accurate than, and at least as reliable as, the credit score that 
is then in use by the Enterprise. The Enterprise Business Assessment 
does not require an Enterprise to consider a credit score model's 
integrity, because the integrity of a credit score model would be 
established in the Credit Score Assessment phase and would not change 
when used in an Enterprise system or process.
3. Fair Lending Assessment
    Section 1254.8(b)(2) of the final rule requires an Enterprise to 
evaluate the fair lending risk and fair lending impact of using the 
applicant's credit score model, in accordance with standards and 
requirements of federal fair lending laws. The fair lending assessment 
must also consider any impact on access to credit related to use of 
that credit score model.
4. Assessment of Impact on Enterprise Operations and Risk Management, 
and Impact on Industry
    Section 1254.8(b)(3) of the final rule requires an Enterprise to 
consider operational impacts to the Enterprises of using the credit 
score produced by the applicant's credit score model, such as 
implementation timing and potential impacts on Enterprise risk 
management. That evaluation must consider whether the benefits of using 
the applicant's credit score can reasonably be expected to exceed the 
adoption and ongoing costs of using that credit score, considering 
costs and benefits to the Enterprises. The Enterprise also must 
consider potential costs and benefits across the entire mortgage 
industry--origination, servicing, and securitization--of adopting a 
newly validated and approved credit score model. The final rule also 
requires an Enterprise to consider potential impacts on mortgage 
eligibility criteria and Enterprise pricing for loan purchases as part 
of any assessment.
5. Competitive Effects
    Section 1254.8(b)(4) of the final rule requires an Enterprise to 
evaluate whether using the applicant's credit score model could have an 
impact on competition in the credit reporting and credit scoring 
industry. This evaluation must consider whether use of a particular 
credit score model could have an impact on competition due to any 
ownership or other business relationship between the credit score model 
developer and any other institution.
6. Third-Party Provider Review
    Section 1254.8(b)(5) of the final rule requires an Enterprise to 
conduct a comprehensive third-party provider review for all applicants, 
consistent with the Enterprise's standards for approval of third-party 
providers. This review should address any financial, governance, 
operational, compliance, legal, and reputational risks associated with 
the third party.
7. Enterprise Standards and Criteria
    Section 1254.8(b)(6) of the final rule permits an Enterprise to 
establish additional requirements for the Enterprise Business 
Assessment. An Enterprise is required to include any additional 
requirements in its Credit Score Solicitation, and those requirements 
are subject to FHFA review and approval as previously discussed.
8. Timing
    Section 1254.8(c) of the final rule requires that an Enterprise 
complete its Enterprise Business Assessment within 240 days.
9. FHFA Evaluation
    Section 1254.8(d) of the final rule provides that FHFA will conduct 
an independent analysis of the potential impacts of any change to an 
Enterprise's credit score model. This analysis will be conducted at the 
same time as the Enterprise Business Assessment. The analysis will 
provide a mechanism for FHFA to make determinations in its capacity as 
safety and soundness

[[Page 41904]]

regulator of the Enterprises with respect to the Enterprise use of 
credit scores. Under the final rule, the FHFA evaluation could result 
in a requirement that an Enterprise conduct additional analysis or 
reporting related to credit scores. The FHFA evaluation would also 
permit FHFA to determine whether the Enterprises will continue to use a 
single credit score or will permit the use of multiple credit scores, 
or to require other changes. Such determination by FHFA may impact an 
Enterprise Business Assessment.

G. Determinations on Applications--Sec.  1254.9

    Section 1254.9(a) of the final rule requires an Enterprise to 
submit to FHFA a proposed determination of approval or disapproval for 
each application. The final rule requires an Enterprise to submit to 
FHFA a proposed determination of approval if an application passes both 
the Credit Score Assessment and the Enterprise Business Assessment. The 
final rule requires an Enterprise to submit to FHFA a proposed 
determination of disapproval of an application if the Enterprise finds 
at any point in the validation and approval process that the 
application should be disapproved. The final rule permits an Enterprise 
to propose disapproval of an application based on any of the criteria 
identified in the Credit Score Solicitation, including any of the 
application requirements or any of the criteria under the Credit Score 
Assessment or the Enterprise Business Assessment.
    FHFA will make its decision on approval or disapproval after 
considering the Enterprise proposal and any other information that FHFA 
determines appropriate. The final rule provides a 45-day review period, 
which FHFA may extend as needed. FHFA's review and approval of a 
proposed Enterprise determination must be completed before the 
Enterprise notifies that applicant. The final rule clarifies that the 
30-day period for any approval or disapproval notification by an 
Enterprise to the applicant begins when FHFA has notified the 
Enterprise of its decision on the proposed Enterprise determination. 
FHFA may impose any appropriate terms, conditions, or limitations on 
its approval or disapproval of the Enterprise proposed determination.
1. Approval of a Credit Score Model
    Section 1254.9(b) of the final rule provides if an Enterprise 
approves an application for a credit score model following FHFA review 
of its proposed determination, the Enterprise must implement the credit 
score model in its mortgage purchase systems that use a credit score 
for mortgage purchases. If an application is approved, the Enterprise 
will notify the applicant and the public of the approval of such 
application within 30 days after FHFA completes its review.
2. Disapproval of a Credit Score Model
    Section 1254.9(c) of the final rule provides that, if an 
application is disapproved, an Enterprise must provide an applicant 
with a notice of disapproval no later than 30 days after FHFA completes 
its review. The Enterprise must provide a description of the reason(s) 
for disapproval in its notice to the applicant.

H. Withdrawal of Application--Sec.  1254.10

    Section 1254.10 of the final rule permits an applicant to withdraw 
its application at any time during the validation and approval process 
by notifying the Enterprise. This allows an applicant to terminate the 
evaluation process for any reason after providing notice to the 
Enterprise. However, because an Enterprise may have already devoted 
considerable resources to the evaluation of the application, the final 
rule does not require the Enterprise to return any application fee paid 
by the applicant. In appropriate circumstances, an Enterprise may 
determine that some portion of the application fee should be refunded 
to the applicant or used to offset the application fee if the applicant 
submits a new application. However, any decision to return a portion of 
an application fee or apply it toward a new application would be in the 
sole discretion of the Enterprise.

I. Pilot Programs--Sec.  1254.11

    Section 1254.11(a) of the final rule permits an Enterprise to 
conduct credit score pilot programs. A pilot program will allow an 
Enterprise to use a credit score model that has not been validated and 
approved under this rule for the limited purpose of evaluating the 
performance of the credit score model.
    Section 1254.11(b) of the final rule requires that an Enterprise 
must submit any proposed pilot program to FHFA for review and approval. 
The Enterprise must provide a complete description of the pilot 
program, including the purpose, duration, and scope of the pilot 
program. This will allow FHFA to ensure that the pilot program 
addresses any requirements that FHFA determines appropriate. For 
example, FHFA may require that an Enterprise publish a solicitation for 
applicants to participate in a pilot program, or FHFA may add other 
terms or limitations as appropriate.
    FHFA expects regulatory notice and timing requirements to apply to 
pilot program applications, even though the credit score model 
considered for a pilot program will not be subject to the full 
regulatory validation and approval process. FHFA believes it would be 
valuable to obtain from the model developer any available information 
that is responsive to the regulatory requirements, such as information 
about the ownership structure and business qualifications of the 
applicant.

VI. Regulatory Determinations

A. Paperwork Reduction Act

    The final rule does not contain any information collection 
requirement that would require the approval of the Office of Management 
and Budget (OMB) under the Paperwork Reduction Act (44 U.S.C. 3501 et 
seq.). Therefore, FHFA has not submitted any information to OMB for 
review.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that 
a regulation that has a significant economic impact on a substantial 
number of small entities must include an analysis describing the 
regulation's impact on small entities. Such an analysis need not be 
undertaken if the agency has certified that the regulation will not 
have a significant economic impact on a substantial number of small 
entities. 5 U.S.C. 605(b). FHFA has considered the impact of the final 
rule under the Regulatory Flexibility Act. The General Counsel of FHFA 
certifies that this final rule will not have a significant economic 
impact on a substantial number of small entities because the regulation 
applies only to the Enterprises, which are not small entities for 
purposes of the Regulatory Flexibility Act.

C. Congressional Review Act

    In accordance with the Congressional Review Act (5 U.S.C. 801 et 
seq.), FHFA has determined that this final rule is a major rule and has 
verified this determination with the Office of Information and 
Regulatory Affairs of the OMB.

List of Subjects in 12 CFR Part 1254

    Mortgages.

Authority and Issuance

0
Accordingly, for the reasons stated in the preamble, and under the 
authority of 12 U.S.C. 4511, 4513, 4526, and Public Law 115-174, 
section 310, 132 Stat.

[[Page 41905]]

1296, FHFA amends subchapter C of chapter XII of Title 12 of the Code 
of Federal Regulations by adding part 1254 to read as follows:

PART 1254--VALIDATION AND APPROVAL OF CREDIT SCORE MODELS

Sec.
1254.1 Purpose and scope.
1254.2 Definitions.
1254.3 Computation of time.
1254.4 Requirements for use of a credit score.
1254.5 Solicitation of applications.
1254.6 Submission and initial review of applications.
1254.7 Credit Score Assessment.
1254.8 Enterprise Business Assessment.
1254.9 Determinations on applications.
1254.10 Withdrawal of application.
1254.11 Pilot programs.

    Authority: 12 U.S.C. 4511, 4513, 4526 and Sec. 310, Pub. L. 115-
174, 132 Stat. 1296.


Sec.  1254.1  Purpose and scope.

    (a) The purpose of this part is to set forth standards and criteria 
for the process an Enterprise must establish to validate and approve 
any credit score model that produces any credit score that the 
Enterprise requires in its mortgage purchase procedures and systems.
    (b) The validation and approval process for a credit score model 
includes the following phases: Solicitation of Applications, Submission 
of Applications and Initial Review, Credit Score Assessment, and 
Enterprise Business Assessment.


Sec.  1254.2  Definitions.

    For purposes of this part, the following definitions apply. 
Definitions of other terms may be found in 12 CFR part 1201, General 
Definitions Applying to All Federal Housing Finance Agency Regulations.
    Credit score means a numerical value or a categorization created by 
a third party derived from a statistical tool or modeling system used 
by a person who makes or arranges a loan to predict the likelihood of 
certain credit behaviors, including default.
    Credit score model means a statistical tool or algorithm created by 
a third party used to produce a numerical value or categorization to 
predict the likelihood of certain credit behaviors.
    Credit score model developer means any person with ownership rights 
in the intellectual property of a credit score model.
    Days means calendar days.
    Mortgage means a residential mortgage as that term is defined at 12 
U.S.C. 1451(h).
    Person means an individual, sole proprietor, partnership, 
corporation, unincorporated association, trust, joint venture, pool, 
syndicate, organization, or other legal entity.


Sec.  1254.3  Computation of time.

    For purposes of this part, each time period begins on the day after 
the relevant event occurs (e.g., the day after a submission is made) 
and continues through the last day of the relevant period. When the 
last day is a Saturday, Sunday, or Federal holiday, the period runs 
until the end of the next business day.


Sec.  1254.4  Requirements for use of a credit score.

    (a) Enterprise use of a credit score. An Enterprise is not required 
to use a credit score for any business purpose. However, if an 
Enterprise conditions its purchase of a mortgage on the provision of a 
credit score for the borrower:
    (1) The credit score must be derived from a credit score model that 
has been approved by the Enterprise in accordance with this part; and
    (2) The Enterprise must provide for the use of the credit score by 
any automated underwriting system that uses a credit score and any 
other procedures and systems used by the Enterprise that use a credit 
score for mortgage purchases.
    (b) Replacement of credit score model. An Enterprise may replace 
any credit score model then in use after a new credit score model has 
been approved in accordance with this part.
    (c) No right to continuing use. Enterprise use of a particular 
credit score model does not create any right to or expectation of 
continuing, future, or permanent use of that credit score model by an 
Enterprise.


Sec.  1254.5  Solicitation of applications.

    (a) Required solicitations. FHFA periodically will require the 
Enterprises to solicit applications from credit score model developers. 
FHFA will determine whether a solicitation should be initiated. FHFA 
will establish the solicitation requirement by notice to the 
Enterprises, which will include:
    (1) The requirement to submit a Credit Score Solicitation to FHFA 
for review;
    (2) A deadline for submission of the Credit Score Solicitation; and
    (3) A timeframe for the solicitation period.
    (b) Credit Score Solicitation. In connection with each required 
solicitation, an Enterprise must submit to FHFA a Credit Score 
Solicitation including:
    (1) The opening and closing dates of the solicitation time period 
during which the Enterprise will accept applications from credit score 
model developers;
    (2) A description of the information that must be submitted with an 
application;
    (3) A description of the process by which the Enterprise will 
obtain data for the assessment of the credit score model;
    (4) A description of the process for the Credit Score Assessment 
and the Enterprise Business Assessment; and
    (5) Any other requirements as determined by the Enterprise.
    (c) Review by FHFA. Within 45 days of an Enterprise submission of 
its Credit Score Solicitation to FHFA, FHFA will either approve or 
disapprove the Enterprise's Credit Score Solicitation. FHFA may extend 
the time period for its review as needed. FHFA may impose such terms, 
conditions, or limitations on the approval of a Credit Score 
Solicitation as FHFA determines to be appropriate.
    (d) Publication. Upon approval by FHFA, the Enterprise must publish 
the Credit Score Solicitation on its website for at least 90 days prior 
to the start of the solicitation time period.
    (e) Initial solicitation. Each Enterprise must submit its initial 
Credit Score Solicitation to FHFA within 60 days of the effective date 
of this regulation. The initial solicitation time period will begin on 
a date determined by FHFA and will extend for 120 days.


Sec.  1254.6   Submission and initial review of applications.

    (a) Application requirements. Each application submitted in 
response to a Credit Score Solicitation must meet the requirements set 
forth in the Credit Score Solicitation to which it responds. Each 
application must include the following elements, and any additional 
requirements that may be set forth in the Credit Score Solicitation:
    (1) Application fee. Each application must include an application 
fee established by the Enterprise. An Enterprise may address conditions 
for refunding a portion of a fee in the Credit Score Solicitation. The 
application fee is intended to cover the direct costs to the Enterprise 
of conducting the Credit Score Assessment.
    (2) Fair lending certification and compliance. Each application 
must address compliance of the credit score model and credit scores 
produced by it with federal fair lending requirements, including 
information on any fair lending testing and evaluation of the model 
conducted. Each application must include a certification that no 
characteristic that is based directly on or

[[Page 41906]]

is highly correlated solely with a classification prohibited under the 
Equal Credit Opportunity Act (15 U.S.C. 1691(a)(1)), the Fair Housing 
Act (42 U.S.C. 3605(a)), or the Safety and Soundness Act (12 U.S.C. 
4545(1)) was used in the development of the credit score model or is 
used as a factor in the credit score model to produce credit scores.
    (3) Use of model by industry. Each application must demonstrate use 
of the credit score by creditors to make a decision whether to extend 
credit to a prospective borrower. An Enterprise may address criteria 
for such demonstration in the Credit Score Solicitation. An Enterprise 
may permit such demonstration of use to include submission of 
testimonials by creditors (mortgage or non-mortgage) who use the 
applicant's credit score when making a determination to approve the 
extension of credit.
    (4) Qualification of credit score model developer. Each application 
must include any information that an Enterprise may require to evaluate 
the credit score model developer (i.e., relevant experience and 
financial capacity). Such information must include a detailed 
description of the credit score model developer's:
    (i) Corporate structure, including any business relationship to any 
other person through any degree of common ownership or control;
    (ii) Governance structure; and
    (iii) Past financial performance.
    (5) Other requirements. Each application must include any other 
information an Enterprise may require.
    (b) Historical consumer credit data. An Enterprise may obtain any 
historical consumer credit data necessary for the Enterprise to test a 
credit score model's historical record of measuring and predicting 
default rates and other credit behaviors. An Enterprise may assess the 
applicant for any costs associated with obtaining or receiving such 
data unless such costs were included in the up-front application fee.
    (c) Acceptance of applications. Each application submitted in 
response to a Credit Score Solicitation within the solicitation time 
period must be reviewed for acceptance by the Enterprise.
    (1) Notice of status. Within 60 days of an applicant's submission, 
the Enterprise must provide the applicant with an Application Status 
Notice, which will indicate whether the application requires additional 
information to be provided by the applicant. An applicant may submit 
additional information through the end of the solicitation period.
    (2) Complete application. Completeness of an application will be 
determined by the Enterprise. An application is complete when an 
Enterprise determines that required information has been received by 
the Enterprise from the applicant and from any third party. Information 
from a third party for a specific application may be received by the 
Enterprise after the solicitation period closes. The Enterprise must 
notify the applicant upon determining that the application is complete 
with a Complete Application Notice.


Sec.  1254.7  Credit Score Assessment.

    (a) Requirement for Credit Score Assessment. An Enterprise will 
undertake a Credit Score Assessment of each application that the 
Enterprise determines to be complete. An Enterprise must determine 
whether an application passes the Credit Score Assessment.
    (b) Testing for Credit Score Assessment. An Enterprise must conduct 
statistical tests for accuracy and reliability that use one or more 
industry standard statistical tests for demonstrating divergence among 
borrowers' propensity to repay using the industry standard definition 
of default, applied to mortgages purchased by an Enterprise (including 
subgroups), as identified by the Enterprise.
    (c) Criteria for Credit Score Assessment. The Credit Score 
Assessment is based on the following criteria:
    (1) Testing for accuracy. A credit score model is accurate if it 
produces a credit score that appropriately reflects a borrower's 
propensity to repay a mortgage loan in accordance with its terms, 
permitting a credit score user to rank order the risk that the borrower 
will not repay the obligation in accordance with its terms relative to 
other borrowers.
    (i) Initial Credit Score Assessment. For the Credit Score 
Assessment of applications submitted in response to the initial 
solicitation under Sec.  1254.5(e), a credit score model meets the test 
for accuracy if it produces credit scores that meet a benchmark 
established by the Enterprise in the initial Credit Score Solicitation, 
as demonstrated by appropriate testing.
    (ii) Subsequent Credit Score Assessments. For the Credit Score 
Assessment of applications submitted in response to any later 
solicitation under this part, a credit score model meets the test for 
accuracy if it produces credit scores that are more accurate than the 
credit scores produced by any credit score model that is required by 
the Enterprise at the time the test is conducted, as demonstrated by 
appropriate testing.
    (2) Testing for reliability. A credit score model is reliable if it 
produces credit scores that maintain accuracy through the economic 
cycle. The Credit Score Assessment must evaluate whether a new credit 
score model produces credit scores that are at least as reliable as the 
credit scores produced by any credit score model that is required by 
the Enterprise at the time the test is conducted, as demonstrated by 
appropriate testing. Testing for reliability must demonstrate accuracy 
at a minimum of two points in the economic cycle when applied to 
mortgages purchased by an Enterprise (including subgroups), as 
identified by the Enterprise.
    (3) Testing for integrity. A credit score model has integrity if, 
when producing a credit score, it uses relevant data that reasonably 
encompasses the borrower's credit history and financial performance. 
The Credit Score Assessment must evaluate whether a credit score model 
applicant has demonstrated that the model has integrity, based on 
appropriate testing or requirements identified by the Enterprise (which 
may address, for example, the level of aggregation of data or whether 
observable data has been omitted or discounted when producing a credit 
score).
    (4) Other requirements. An Enterprise may establish requirements 
for the Credit Score Assessment in addition to the criteria established 
by FHFA.
    (c) Third-party testing. Testing required for the Credit Score 
Assessment may be conducted by:
    (1) An Enterprise; or
    (2) An independent third party selected or approved by an 
Enterprise.
    (d) Timing of Credit Score Assessment. (1) An Enterprise must 
notify the applicant when the Enterprise begins the Credit Score 
Assessment. The Credit Score Assessment will begin no earlier than the 
close of the solicitation time period, unless FHFA has determined that 
an Enterprise should begin a Credit Score Assessment sooner. The Credit 
Score Assessment will extend for 180 days. FHFA may authorize not more 
than two extensions of time for the Credit Score Assessment, which 
shall not exceed 30 days each, upon a written request and showing of 
good cause by the Enterprise.
    (2) An Enterprise must provide notice to the applicant within 30 
days of a determination that the application has passed the Credit 
Score Assessment.

[[Page 41907]]

Sec.  1254.8  Enterprise Business Assessment.

    (a) Requirement for Enterprise Business Assessment. An Enterprise 
will undertake an Enterprise Business Assessment of each application 
that the Enterprise determines to have passed the Credit Score 
Assessment. An Enterprise must determine whether an application passes 
the Enterprise Business Assessment.
    (b) Criteria for Enterprise Business Assessment. The Enterprise 
Business Assessment is based on the following criteria:
    (1) Accuracy; reliability. The Enterprise Business Assessment must 
evaluate whether a new credit score model produces credit scores that 
are more accurate than and at least as reliable as credit scores 
produced by any credit score model currently in use by the Enterprise. 
This evaluation must consider credit scores as used by the Enterprise 
within its systems or processes that use a credit score for mortgage 
purchases.
    (2) Fair lending assessment. The Enterprise Business Assessment 
must evaluate the fair lending risk and fair lending impact of the 
credit score model in accordance with standards and requirements 
related to the Equal Credit Opportunity Act (15 U.S.C. 1691(a)(1)), the 
Fair Housing Act (42 U.S.C. 3605(a)), and the Safety and Soundness Act 
(12 U.S.C. 4545(1)) (including identification of potential impact, 
comparison of the new credit score model with any credit score model 
currently in use, and consideration of potential methods of using the 
new credit score model). This evaluation must consider credit scores as 
used by the Enterprise within its systems or processes that use a 
credit score for mortgage purchases. The fair lending assessment must 
also consider any impact on access to credit related to the use of a 
particular credit score model.
    (3) Impact on Enterprise operations and risk management, and impact 
on industry. The Enterprise Business Assessment must evaluate the 
impact using the credit score model would have on Enterprise operations 
(including any impact on purchase eligibility criteria and loan 
pricing) and risk management (including counterparty risk management) 
in accordance with standards and requirements related to prudential 
management and operations and governance set forth at parts 1236 and 
1239 of this chapter. This evaluation must consider whether the 
benefits of using credit scores produced by that model can reasonably 
be expected to exceed the adoption and ongoing costs of using such 
credit scores, considering projected benefits and costs to the 
Enterprises. The Enterprise Business Assessment must evaluate the 
impact of using the credit score model on industry operations and 
mortgage market liquidity, including costs associated with 
implementation of a newly approved credit score. This evaluation must 
consider whether the benefits of using credit scores produced by that 
model can reasonably be expected to exceed the adoption and ongoing 
costs of using such credit scores, considering projected benefits and 
costs to the Enterprises and borrowers, including market liquidity and 
cost and availability of credit.
    (4) Competitive effects. The Enterprise Business Assessment must 
evaluate whether using the credit score model could have an impact on 
competition in the industry. This evaluation must consider whether use 
of a credit score model could have an impact on competition due to any 
ownership or other business relationship between the credit score model 
developer and any other institution.
    (5) Third-Party Provider Review. The Enterprise Business Assessment 
must evaluate the credit score model developer under the Enterprise 
standards for approval of third-party providers.
    (6) Other requirements. An Enterprise may establish requirements 
for the Enterprise Business Assessment in addition to the criteria 
established by FHFA.
    (c) Timing of Enterprise Business Assessment. The Enterprise 
Business Assessment must be completed within 240 days.
    (d) FHFA Evaluation. FHFA will conduct an independent analysis of 
the potential impacts of any change to an Enterprise's credit score 
model. FHFA will initiate its analysis no later than the beginning of 
the Enterprise Business Assessment. Based on its analysis, FHFA may:
    (1) Require an Enterprise to undertake additional analysis, 
monitoring, or reporting to further the purposes of this part;
    (2) Require an Enterprise to permit the use of a single credit 
score model or multiple credit score models; or
    (3) Require any other change to an Enterprise program, policy, or 
practice related to the Enterprise's use of credit scores.


Sec.  1254.9  Determinations on applications.

    (a) Enterprise determinations subject to prior review and approval 
by FHFA. An Enterprise must submit to FHFA a proposed determination of 
approval or disapproval for each application. Within 45 days of an 
Enterprise submission, FHFA must approve or disapprove the Enterprise's 
proposed determination. FHFA may extend the time period for its review 
as needed. FHFA may impose such terms, conditions, or limitations on 
the approval or disapproval of the Enterprise's proposed determination 
as FHFA determines to be appropriate.
    (b) Approval of a credit score model. If an Enterprise approves an 
application for a credit score model following FHFA review of its 
proposed determination, the Enterprise must implement the credit score 
model in its mortgage purchase systems that use a credit score for 
mortgage purchases. The Enterprise must provide written notice to the 
applicant and the public within 30 days after the FHFA decision on the 
proposed determination.
    (c) Disapproval of a credit score model. If an Enterprise 
disapproves an application for a credit score model following FHFA 
review of its proposed determination, the Enterprise must provide 
written notice to the applicant within 30 days after the FHFA decision 
on the proposed determination. An application may be disapproved under 
this section at any time during the validation and approval process 
based on any of the criteria identified in the Credit Score 
Solicitation. The notice to the applicant must provide a description of 
the reasons for disapproval.


Sec.  1254.10  Withdrawal of application.

    At any time during the validation and approval process, an 
applicant may withdraw its application by notifying an Enterprise. The 
Enterprise may, in its sole discretion, determine whether to return any 
portion of the application fee paid by the applicant.


Sec.  1254.11   Pilot programs.

    (a) Pilots permitted; duration of pilots. An Enterprise may 
undertake pilot programs to evaluate credit score models. If a pilot 
program involves a credit score model not in current use by an 
Enterprise, the credit score model is not required to be approved under 
this part.
    (b) Prior notice to FHFA. Before commencing a pilot program, an 
Enterprise must submit the proposed pilot program to FHFA for review 
and approval. The Enterprise's submission to FHFA must include a 
complete and specific description of the pilot program, including its 
purpose, duration, and scope. FHFA may impose such terms, conditions, 
or limitations on the pilot program as FHFA determines to be 
appropriate.


[[Page 41908]]


    Dated: August 13, 2019.
Mark A. Calabria,
Director, Federal Housing Finance Agency.
[FR Doc. 2019-17633 Filed 8-15-19; 8:45 am]
 BILLING CODE 8070-01-P