TransUnion (NYSE:TRU), a global risk and information solutions provider, has raised concerns over plans by Fannie Mae and Freddie Mac to qualify borrowers using two credit reports instead of three. The company's research was presented on Monday at the Mortgage Bankers Association's MBA Annual Convention & Expo by Joe Mellman.
The study critically assessed the potential impacts of transitioning to a bi-merge system in the mortgage underwriting process, warning that it could disqualify nearly two million consumers from Government-Sponsored Enterprises (GSEs) mortgages due to inconsistent lender reporting. This approach may distort borrowers' creditworthiness if the most beneficial data is omitted, leading to 600,000 new mortgage borrowers potentially paying an additional $6,600 in interest over their mortgage term.
According to Mellman, this change could disproportionately impact Black, Hispanic, low-to-moderate income (LMI), and first-time homebuyers—groups over-represented by 50% with credit scores close to 620. In a bi-merge system, first-time homebuyers with thin files or new-to-credit status might face higher interest rates or become unscorable. A single missing tradeline due to using fewer credit reports could drastically affect homebuyer eligibility and monthly payments.
Despite initial beliefs by the Federal Housing Finance Agency (FHFA) and Standard & Poor's that this change wouldn't significantly affect average scores, TransUnion warns of increased costs for some consumers. The FHFA has paused this transition indefinitely as TransUnion calls for further evaluation of multidimensional impacts, including potential increases in credit and risk management costs.
Mellman also emphasized the substantial impact on 580,000 people who could pay an additional $6,600 in interest over their loan lifetimes due to random report removal. Changes in mortgage eligibility would occur with 1.78 million becoming newly eligible and 1.98 million losing eligibility. Additionally, 178,000 newly eligible might overestimate their loan repayment ability.
While industry insiders speculate that FHFA might make two-report use optional for lenders, upfront savings from buying just two reports could benefit consumers facing affordability issues due to rising home prices. However, TransUnion hasn't tested how this change would interact with Fannie and Freddie's planned modernized scoring models by 2025.
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