Opinion: Why the dual credit score mandate raises costs for small businesses without clear benefits

Washington says it wants to lower costs and expand access to credit. For millions of entrepreneurs, access to credit depends not only on the health of their businesses but also on their personal credit profiles. That is why regulatory decisions that make borrowing more complex or expensive deserve close scrutiny. 

Recent disclosures obtained through a Freedom of Information Act (FOIA) request by the Housing Policy Council raise important questions about the Federal Housing Finance Agency’s (FHFA) decision to require the use of two credit scores for mortgages sold to Fannie Mae and Freddie Mac.

As part of an FHFA-directed review of credit score models, Fannie Mae and Freddie Mac were asked to evaluate and recommend which models should be approved. Both Enterprises recommended moving to a single modernized credit score that incorporates trended credit data and advised against requiring an additional score as part of the transition. FHFA overruled that recommendation and instead required a dual-score framework.

That decision carries real consequences for borrowers, lenders and small businesses by raising costs and introducing uncertainty into mortgage underwriting, and it warrants reconsideration before implementation is locked in.

Unanswered questions in the FHFA review process 

The FOIA disclosures are noteworthy because they show that FHFA’s own review process produced a different recommendation than the one ultimately adopted. FHFA itself stated that “requiring two different scores for each borrower is a significant change” and acknowledged that implementation would be a multiyear effort because of the “complexity and broad impact to the industry.” The agency also noted that credit scores are used throughout the mortgage process and that determining how two different scores will operate across systems will require extensive coordination among lenders, investors, mortgage insurers and other stakeholders.

FHFA argues that requiring multiple scores will improve accuracy, prevent adverse selection and promote competition within the mortgage market. Its determination states that requiring lenders to deliver both scores would prevent lenders from choosing which score to use for eligibility or pricing. But if the Enterprises themselves, after conducting the requested evaluations, did not conclude that two scores were necessary, it is reasonable to ask what evidence justifies overriding that recommendation. FHFA has also stated that it is not publicly releasing the underlying testing results, making it difficult for outside stakeholders to independently evaluate the agency’s conclusions.

Systemic costs and real-world consequences 

For mortgage lenders, implementation extends beyond simply obtaining an additional score. In practice, it can mean updates to loan origination systems, pricing engines, compliance procedures, quality-control reviews, secondary-market delivery processes and investor reporting requirements. Mortgage technology providers and lenders alike will need to test, validate and monitor how multiple scores affect underwriting and pricing decisions. Those investments may be manageable for large institutions, but they still carry costs that ultimately flow through the mortgage system.

For small businesses, this is not an abstract debate. Personal and business finances remain closely linked for many entrepreneurs. Federal Reserve survey data show that 59% of small businesses with debt rely on a personal guarantee, while more than half of firms facing financial challenges reported using personal funds to support their businesses. Changes that affect the cost, availability or predictability of consumer credit can ultimately affect the ability of small business owners to invest, hire and grow.

When lenders face new operational mandates, those costs do not remain confined to compliance departments. Over time, lenders often incorporate added complexity and uncertainty into pricing models, risk management practices and underwriting standards. That can mean higher rates, tighter credit or reduced flexibility for borrowers near approval thresholds, including self-employed applicants, entrepreneurs with thin credit files, first-time homebuyers and borrowers whose risk characteristics may be assessed differently across models.

Preserving flexibility in credit modernization 

Supporters of the dual-score framework point to competition and pricing concerns. But requiring two scores does not automatically resolve those concerns. Credit scores represent only one component of the mortgage process, while broader cost pressures stem from technology investments, regulatory compliance obligations, operational requirements and other market factors. Introducing parallel scoring frameworks risks adding costs for lenders without clearly reducing costs for borrowers.

Importantly, the issue is not whether the mortgage market should adopt newer credit scoring models. Updating credit scoring models to reflect evolving data and risk patterns is appropriate and necessary. The question is whether requiring both models simultaneously creates benefits sufficient to justify the added operational burden.

A simpler approach would preserve flexibility while reducing risk: Allow lenders to rely on a single modernized score, with the option to use additional models where appropriate. That approach would promote innovation without forcing unnecessary complexity into a system that directly affects borrowing costs.

FHFA still has time to reconsider how this transition is implemented. Before moving further, the agency should publicly release the analysis underlying its decision, explain why it departed from its own Enterprise review process and demonstrate that the benefits outweigh the costs lenders, borrowers and small businesses will ultimately bear.

John Stanford, Co-executive Director, Small Business Roundtable
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners. To contact the editor responsible for this piece: zeb@hwmedia.com.