By Rod Alba
ABA has been active in recent months on issues important to banks in the mortgage space. The following is a rundown of the main topics ABA’s advocacy team has been working on.
Credit score modernization
ABA continues to work with Federal Housing Finance Agency on its initiative to upgrade and modernize credit score models used for loans sold to Fannie Mae and Freddie Mac. ABA staff is holding periodic meetings with FHFA technical staff to ensure that the transition from “tri-merge” to “bi-merge” requirements, and the substitution to FICO 10 T and VantageScore 4.0, are appropriately implemented and supported by adequate resources that allow banks to properly transition under a process that will attract much regulatory scrutiny.
Although FHFA recently released VantageScore 4.0 historical credit data (April 2013 through March 2023) to ease transition to new credit reporting requirements, ABA and industry partners are insisting that FHFA reformulate proposed timelines to assure sufficient time and flexibility to incorporate testing and unexpected events. In addition, the joint trades have emphasized via written communications that it is imperative to have credit reporting data “through the cycle” back to 2003 given the sensitivity of mortgage default and prepayment to origination credit scores.
Effect on banks: The planned credit score transitions to different upgraded models will affect underwriting policies, pricing grids, risk management compliance and likely will require historical back testing and fair lending analysis, among other things. While banks are committed to supporting efforts by FHFA along with Fannie Mae and Freddie Mac—the enterprises—on this project, it is also critical that FHFA understand and consider the broader implications and potential negative impacts on the pricing of mortgage credit if industry stakeholders are unable to obtain the data necessary to complete their analysis.
GSE updates to replacement cost value
ABA is meeting with government sponsored enterprises and FHFA staff to accommodate concerns regarding recent revisions to the property insurance requirements in their selling and servicing guides. The updates, dubbed “clarifications,” were aimed to be effective as of June 1, 2024, and advanced that verification of a replacement cost value insurance policy is not sufficient evidence of required insurance coverage. Instead, lenders and servicers must obtain confirmation from an insurer (or other source) at origination and annually thereafter that the numerical RCV at which a policy is written is indeed the RCV.
ABA is having ongoing meetings with officials, focusing on pushing the enterprises to delaying application of the new policy, and providing additional, written, guidance on the property insurance requirements to facilitate compliance by lenders and servicers. ABA has expressed that lenders should be allowed to continue relying on the existence of replacement cost coverage under the policy and the expertise of insurers in providing an RCV, along with additional optional coverage features for consumers to consider when purchasing the coverage and policy limits that best meet their individual needs and budget.
Recently, ABA and industry partners obtained important concessions when Fannie Mae and Freddie Mac announced they would hold off on plans to act upon mortgages on homes that don’t carry full replacement-value insurance coverage. More conversations are expected in the coming weeks.
Effect on banks: Lenders and servicers provide “rep and warranty” assurance that property insurance coverage meets GSE requirements, so this change exposes lenders and servicers to unfair financial risks, especially in times of unstable housing prices and in areas that may be affected by more severe hazards. Moreover, this change negatively impacts consumers as it will likely lead to increased costs and increase potential payment defaults.
Multiple comments filed
ABA has filed multiple mortgage-related comments with the Consumer Financial Protection Bureau, on proposals that impact operations.
- Request for information regarding fees charged for residential mortgage transactions. On Aug. 2, ABA filed two comment letters, one a joint trade association letter that discusses principles that should guide the CFPB’s future policy decisions regarding mortgage fees and the other an ABA letter, which describes the strong laws that already exist making additional regulations unnecessary in mortgage loan transactions.
- Removal of medical debt from credit reports. On Aug. 12, ABA commented on the CFPB’s proposed rule concerning the use and reporting of medical debt under the Fair Credit Reporting Act. Absent appropriate clarity, ABA warned the proposal could undermine banks’ ability to assess credit risk and potentially create conflict with Regulation Z.
- Proposed mortgage servicing rule changes. On Sept. 9, ABA expressed support for those aspects of the proposal that will simplify and streamline the loss mitigation process while preserving consumer protection. ABA noted, however, that CFPB lacks authority to prohibit fees for borrowers under loss mitigation and to impose language access requirements.
Rod Alba is ABA’s SVP for real estate finance.
