Bi-Merge vs. Tri-Merge Credit Report

In the fall of 2022, the Federal Housing Finance Authority (FHFA) unveiled the Enterprise Credit Score and Credit Reports Initiative. This dual-phase plan aims to shift from requiring three credit reports for borrowers to just two reports, termed a ‘bi-merge.’ Additionally, it intends to transition from current scoring models to FICO 10T and Vantage 4.0. While the latter phase boasts several advantages, the first part of this initiative has sparked concerns within the industry.

How would a bi-merge work?
Currently, when a consumer applies for a mortgage, each bureau (Experian, TransUnion, and Equifax) generates a credit report for the borrower. The middle score among the three determines the mortgage interest rate. However, with a bi-merge, the two scores are averaged to create a determinative score. This might significantly differ from the outcome when all three bureaus are considered, potentially impacting borrowers either positively or negatively. In joint credit reports, the combined average of both borrowers’ two scores determines the final score, with the lower of the two being the deciding factor.

What are the concerns in using a bi-merge report?
The primary concern regarding a bi-merge credit report revolves around its potential to present an inaccurate picture of the borrower’s creditworthiness. Since not all creditors report to every bureau — some report to only two or even just one — using a bi-merge may lead to missing credit information for the borrower. Consequently, this missing data could disqualify some credit-worthy borrowers in certain cases. Conversely, it might also lead to approvals for those who might not actually qualify, increasing the risk of defaults and subsequently elevating the repurchase risk.

What impact would a bi-merge have on the industry?
In a recent analysis done by Trans Union, they found that “the biggest impact would be two million consumers becoming ineligible for a mortgage backed by the GSE’s (Government Sponsored Enterprises) Fannie Mae and Freddie Mac.” They also highlighted that “the ineligibility would stem from gaps that can exist among lenders when it comes to reporting a complete credit picture, particularly if a potential borrower’s most favorable set of credit data comes from the bureau that would be excluded in the b-merge.”

Numerous industry professionals share this same concern and collectively conveyed their concerns to the FHFA. The head of U.S Financial Services articulated, “By intentionally bypassing vital consumer credit information from the third credit bureau, the proposed changes could result in miscalculated consumer affordability and risk. As a result, many consumers will be given mortgages they cannot afford or at a higher cost.”

According to the FHFA the bi-merge is “a way to promote competition between the credit bureaus and reduce lender credit reporting costs.” However, it could lead to increased costs for the borrower, particularly if they’re deemed ineligible for a better rate that could have been obtained through a tri-merge credit report encompassing the borrower’s complete credit history.

There’s also a notable concern about the selective implementation of these changes, focusing solely on GSE loans while leaving out non-conforming loans such as FHA, VA, and USDA. Although the FHFA has communicated with these entities, it’s unclear if they will follow the standards established for Fannie Mae and Freddie Mac at this point.

So, where does this leave us?
The timeline for this remains uncertain. Initially, the FHFA proposed a transition to the bi-merge in Q1 2024. However, this schedule has been postponed indefinitely. The FHFA is currently conducting stakeholder forums to address potential implications of the proposed changes and other unresolved issues before implementing such a transition. At this stage, this initiative is complex, filled with uncertainties, and lacks definitive answers. Hopefully, these forums will offer resolutions to many outstanding questions and pave the way for a unified approach to this transition.