When you need to make an important decision, you should gather a lot of information first.
Think about the last time you bought a car. Did you walk on a lot, point to a vehicle, and pay the full sticker price? No. This isn’t like buying a bunch of bananas or a gallon of milk, where you can simply grab and go. This is a big decision that will impact you for years.
Before even talking to a salesman, you probably researched autos online, decided what features you wanted, weighed all the other factors on reviews and ratings (both objective and subjective), and decided how much you would be willing to spend and how much it should cost. Only then, having done research, would you go look at a car. And you probably looked at several before bringing one home.
This isn’t “paralysis by analysis.” You are, after all, going to make a purchase. But you need to do the analysis to know you are being treated fairly and making a smart decision.
Not surprisingly, the people who loan money to home buyers also try to gather plenty of information before they sign on the dotted line. There are three different companies that track consumer credit, and lenders usually pull a report from each of them. This is known as the tri-merge credit reporting standard. Lenders review the reports to get an accurate idea of how risky a loan will be. This allows them to charge a fair interest rate: customers with poor credit are riskier bets and will pay more for a loan.
There is a good reason why companies that lend for homes don’t rely on just one or two credit reports to make a decision. Research shows that relying on a single credit report instead of the tri-merge standard can significantly change a borrower’s credit score. In one analysis, a third of consumers had at least one single report score that differed from the tri-merge score by 10 points or more; 18 percent by at least 20 points; and seven percent by 40 points or more.
By pulling three credit scores, lenders have a better picture of a borrower’s financial history and potential to repay over time. Unfortunately, the federal government is being lobbied to reduce the number of credit scores lenders are required to consider, potentially forcing decisions with less complete information.
The Federal Housing Finance Agency (FHFA) is the government agency established in 2008 that oversees lending. During the Biden administration, the agency started considering changes to this tri-merge system, including allowing fewer credit reports. In the first year of the Trump administration, outside groups cranked up the pressure to allow a bi-merge (only two credit reports) or even a single-pull system (only one report). The Biden Administration proposal should concern lenders and borrowers alike.
For example, reducing credit visibility would force lenders and investors to raise interest rates to protect themselves from the uncertainty inherent in loans relying on less data. The higher mortgage rates that result would become the standard for all borrowers.
Even if you aren’t planning to buy or refinance a home, this decision could ripple through the economy and hurt you. The housing finance market is deeply interconnected, and the second-order effects from losing the tri-merge would lead to a weaker market with higher costs for all of us.
Today, government-backed entities support nearly three-quarters of all mortgages. Taxpayers are directly exposed to the health of mortgage loans, so it’s critical that the government protect itself and us by maintaining strong safeguards and reliable credit evaluation, such as the tri-merge standard.
The push for a bi-merge or single-pull system is a remnant of the Biden era, when the president and his team abandoned economic reality for an ideological gambit. That didn’t work out well, and the Trump administration should resist this push to resuscitate these foolish credit proposals.