5203.2: Credit Scores (06/27/18)

© Freddie Mac Single-Family Seller Servicer Guide

Freddie Mac requires the Seller to use Credit Scores to underwrite Manually Underwritten Mortgages. A Credit Score used to underwrite a Borrower's credit reputation is referred to as an "Underwriting Score." See Sections 5202.3 and 5202.4 for information needed to determine the Borrower has an acceptable credit reputation.

Freddie Mac may require that one Credit Score be identified and delivered for a Mortgage for reasons such as eligibility or pricing. When one Credit Score is required, the Credit Score is referred to as the "Indicator Score." The Indicator Score must be identified in accordance with Section 5203.2(e) and must be delivered in accordance with the requirements of Section 5203.2(f). 

To expand the range of Mortgage products with higher-risk characteristics that Freddie Mac is able to purchase, the eligibility of such Mortgages may be limited to those having a minimum Indicator Score. When a minimum Indicator Score is required, it must be met or exceeded for the Mortgage to be eligible for delivery to Freddie Mac.

For example, to be eligible for sale to Freddie Mac, a minimum Indicator Score is required for Manually Underwritten Mortgages that are:

• Investment Property Mortgages
• Mortgages secured by second homes
• Mortgages secured by 2- to 4-unit Primary Residences, or
• Cash-out Refinance Mortgages

The minimum Indicator Score requirements are noted in Exhibit 25, Mortgages with Risk Class and/or Minimum Indicator Score Requirements. If the Borrower does not have a usable Credit Score in connection with a purchase transaction or "no cash-out" refinance Mortgage secured by a 1- to 4-unit Primary Residence that is not a super conforming Mortgage, then the use of Noncredit Payment References as described in Section 5202.2(b) is acceptable.

For Loan Product Advisor® Mortgages, Credit Scores are obtained by Loan Product Advisor and provided with the in-file credit report(s) or merged credit report(s). A minimum Indicator Score, in most cases, is not required for Accept Mortgages and A-minus Mortgages since Loan Product Advisor has made the determination that the Borrower's credit reputation and the Mortgage product are acceptable. If Exhibit 25 requires a minimum Indicator Score for Loan Product Advisor Mortgages, the Indicator Score delivered by Seller will be used to assess whether or not the minimum Indicator Score requirements have been met. If, however, the Seller does not deliver an Indicator Score, then the Indicator Score determined by Loan Product Advisor will be used to assess whether or not the minimum Indicator Score requirements have been met. An Indicator Score does not indicate that the Borrower's credit reputation is acceptable. Even when the Indicator Score for the Mortgage exceeds the minimum required, the Seller must determine that each Borrower individually, and that all Borrowers collectively, have an acceptable credit reputation.

Unless the Mortgage is sold through Cash-Released XChangeSM, for Indicator Score/Loan-to-Value (IS/LTV) Credit Fees in Price applicable to Loan Product Advisor Mortgages, the applicable Credit Fee in Price will be based on the LTV ratio calculated by Freddie Mac based on data delivered by the Seller, and the Indicator Score found on the Last Feedback Certificate.

If the Seller does not deliver the Key Number for a Loan Product Advisor Mortgage, the Mortgage will be assessed the below 620 IS/LTV fee. For Mortgages sold through Cash-Released XChangeSM, the Seller must deliver ULDD Data Point Loan Level Credit Score Value regardless of whether the Mortgage is a Loan Product Advisor Mortgage, and the Mortgage will be assessed an IS/LTV Credit Fee in Price based on the ULDD Data Point Loan Level Credit Score Value.

For Non-Loan Product Advisor Mortgages, an Indicator Score is required (see Exhibit 25 for Indicator Score requirements). With the exception of a purchase transaction or "no cash-out" refinance Mortgage secured by a 1- to 4-unit Primary Residence, other than a Manufactured Home, if no Borrower has a usable Credit Score, there can be no Indicator Score for the Mortgage and it is not eligible for sale to Freddie Mac. If the Borrower does not have a usable Credit Score in connection with a purchase transaction or "no cash-out" refinance Mortgage secured by a 1- to 4-unit Primary Residence that is not a super conforming Mortgage, underwriting without credit scores as described in Sections 5202.3 and 5202.5 through 5202.6 is acceptable to evaluate the Borrower's credit reputation

If no Borrower has a usable Credit Score and an Indicator Score is not required for the Mortgage to be eligible, see Section 5203.2(f) for delivery requirements. Freddie Mac will not assess an Indicator Score/Loan-to-Value Credit Fee in Price or a Credit Score/Loan-to-Value (CS/LTV) Credit Fee in Price (A-minus fee) for Mortgages when the Seller determines there is no usable Credit Score due to insufficient information or inaccurate information that is delivered in accordance with Section 5203.2(f).

The methods used to obtain, select and identify both Underwriting Scores and Indicator Scores are described in Sections 5203.2(d) and (e).

(a) Types of Credit ScoresFreddie Mac requires the Seller to use a FICO® score, whenever a usable Credit Score is required. FICO scores have different names at each of the three major United States credit reporting companies. All of these scores, however, are developed using the same methods by FICO.FICO scores are known as:

Freddie Mac has identified a strong correlation between Mortgage performance and FICO Bureau scores (FICO score). FICO scores range from 300 to 850. The lower the FICO score, the greater the risk of default.(b) Obtaining FICO scoresFICO scores can be obtained by requesting a credit reporting company (often called a consumer reporting agency, a credit repository or a credit bureau) to provide them as part of the required credit report. The Seller must request FICO scores and accompanying reason codes from at least two of the credit repositories, for each Borrower.The three credit repositories are:

• Equifax Credit Information Services
• Experian Information Systems and Services
• TransUnion Credit Information Company

The following versions of the FICO score are required for Manually Underwritten Mortgages:

• Beacon 5.0/Equifax FICO Score v5
• Experian/Fair Isaac Risk Model v2
• TransUnion FICO Risk Score 04

It is unusual for a Borrower who reports credit obligations on the application not to have a FICO score. If no FICO score is received for such a Borrower, the Seller must re-check the information provided when ordering the FICO scores and resubmit a request if an error is identified.

The Seller must obtain FICO scores no more than 120 days prior to, as applicable, the Note Date, the modification date for Seller-Owned Modified Mortgages, the Conversion Date for Seller-Owned Converted Mortgages or assumption agreement date.

For Construction Conversion and Renovation Mortgages, the Seller must obtain FICO scores no more than 120 days prior to the Effective Date of Permanent Financing.

(c) Usable Credit/FICO scores For Manually Underwritten Mortgages, the Seller must determine that each Credit Score (FICO score) received is usable. For a FICO score to be usable it must be based on sufficient, accurate information. Too little information, or information that is significantly inaccurate, makes the FICO score unusable for Mortgage underwriting. This is important both to ensure that the FICO score is adequately indicative of a Borrower's credit reputation and to ensure fairness for Borrowers in using Credit Scores to evaluate their overall credit reputation.

(i) Insufficient information Although FICO scores may be generated if a repository's file includes only one Tradeline, the Seller must not use any FICO score based on fewer than three Tradelines. This is important both to ensure that the FICO score is adequately indicative of a Borrower's credit reputation and to ensure fairness for Borrowers in using Credit Scores to evaluate their overall credit reputation.

Because a merged credit report or Residential Mortgage Credit Report (RMCR) may show more Tradelines than were included in the particular repository's file used to generate the FICO score, the Seller should request that the credit reporting company indicate on the credit report the number of Tradelines that were used to create each FICO score. Alternatively, the Seller may wish to obtain the in-file report used to create each FICO score and use the in-file report to determine if the FICO score was based on at least three Tradelines.

(ii) Inaccurate information If the credit reporting company reports that the repository file used to create a FICO score contains inaccurate information about a Borrower's credit history, the Seller must determine if the inaccuracy is significant and, if so, it must disregard that FICO score and explain the decision on Form 1077, Uniform Underwriting and Transmittal Summary, or another document in the Mortgage file. However, minor discrepancies in the balances owed or payment amounts on open accounts belonging to the Borrower are not to be considered significant. FICO scores based on information that includes minor discrepancies must be used to select an Underwriting Score for each Borrower and identify an Indicator Score for the Mortgage.

The Seller must disregard FICO scores based on significant inaccuracies. Significant inaccuracies include:

• Public records information on a bankruptcy, foreclosure, judgment or collection that does not belong to the Borrower
• Delinquencies that are reported in error
• One or more Tradelines that do not belong to the Borrower
• Tradelines for accounts for which the Borrower is not the primary account holder, but is listed as an authorized user (authorized user accounts). However, the Seller does not have to disregard the FICO score if the Seller obtains and retains evidence in the Mortgage file of at least one of the following for each authorized user account:
  
  • Another Borrower on the Mortgage owns the Tradeline in question
  • The Tradeline is owned by the Borrower's spouse, or
  • The Borrower has been making the payments on the account for the last 12 months

If the Seller is unable to document one of the above three requirements for each authorized user account, the FICO score does not have to be disregarded if the Seller determines that the authorized user accounts have an insignificant impact on the Borrower's overall credit history and the information on the credit report is representative of the Borrower's own credit reputation. The Seller should base its determination on the number of the Borrower's own Tradelines, as well as their age, type, size and the payment history, as compared to the authorized user accounts. The Seller must document its determination on Form 1077 or another document in the Mortgage file.

The Seller must not attempt to adjust the value of a FICO score because some information used to create the score is inaccurate. The Seller may obtain and use a different FICO score from another repository if the score obtained from that repository was not based on similar inaccurate information. This is important both to ensure that the FICO score is adequately indicative of a Borrower's credit reputation and to ensure fairness for Borrowers in using Credit Scores to evaluate their overall credit reputation.

For each Mortgage that the Seller has determined the inaccurate information is significant, the Mortgage file must contain written documentation from the repository of credit information or the creditor reporting the inaccurate information affirming the errors. In addition, the Seller is strongly encouraged to inform the Borrower that, pursuant to rights granted under the federal Fair Credit Reporting Act, the Borrower has a right to contact both the consumer reporting agency (repository) from which the inaccurate FICO score was obtained and the furnisher of the inaccurate credit information to require the disputed credit information to be reinvestigated and corrected. The requirements of this paragraph do not apply to authorized user accounts.

(d) Identifying the Underwriting Score for each Borrower To use Credit Scores to underwrite the Borrower's credit reputation, the Seller must select a single FICO score for each qualifying Borrower from the FICO scores that were received and determined to be usable as described above.

To identify the Underwriting Score, the Seller must use the middle/lower method.

• If three usable FICO scores are obtained for a Borrower, the Underwriting Score for that Borrower is the one with the middle value. For example, if the FICO scores are 660, 656, 640, the single FICO score selected by the Seller would be 656. When there is a duplicate score, the Seller would select that score to be the Underwriting Score. If the FICO scores for a Borrower are 660, 660 and 640, the Seller would select 660.
• If two usable FICO scores are obtained for a Borrower, the Underwriting Score for that Borrower is the lower of the two FICO scores
• If only one usable FICO score is obtained for a Borrower, that FICO score is the Underwriting Score

(e) Identifying the Indicator Score for the Mortgage when a minimum Indicator Score is required When a minimum Indicator Score is required to establish eligibility for the product offering, it must be met or exceeded for the Mortgage to be eligible for delivery to Freddie Mac. 

Before the Seller can identify an Indicator Score, the Seller must select a single FICO score for each qualifying Borrower as described above.

If a Borrower has no usable FICO score, so no Underwriting Score can be identified for that Borrower, the Seller may use the Underwriting Scores for the remaining Borrowers to identify the Indicator Score. If no Borrower has a usable FICO score, and an Indicator Score is required for the Mortgage to be eligible, there can be no Indicator Score for the Mortgage and it is not eligible for sale to Freddie Mac.The minimum Indicator Score requirements for Mortgages are noted in the individual chapters or sections for the product offerings and in Exhibit 25.

There are three methods of identifying an Indicator Score, as described in more detail below. Freddie Mac:

• Permits the Seller to use any one of three methods
• Prefers the Seller use one method for all their loans
• Recommends the Seller use the middle/lower then lowest method to identify an Indicator Score
  
  

(i) Middle/lower then lowest method To use the middle/lower then lowest method, the Seller must follow the requirements in the Sections 5203.2(a) through 5203.2(d) to find an Underwriting Score for each qualifying Borrower, and then choose the lowest Underwriting Score as the Indicator Score for the Mortgage. If there is only one qualifying Borrower, that Borrower's Underwriting Score is the Indicator Score for the Mortgage.

(ii) Middle/lower then average method The Seller must follow all of the requirements in Sections 5203.2(a) through 5203.2(d) except the Indicator Score would be the average value of all Underwriting Scores.

(iii) Average/average method The Seller must follow all of the requirements in Sections 5203.2(a) through 5203.2(d) except that the Underwriting Score for each qualifying Borrower would be the average value calculated from all usable FICO scores received for the Borrower. The Indicator Score is the average value of all Underwriting Scores.The middle/lower then lowest method is the most predictive of the overall credit reputation of the Mortgage. The CS/LTV and Indicator Score/Loan-to-Value Credit Fee in Price rates in Exhibit 19, Credit Fees in Price, assume that the middle/lower then lowest method has been used to identify the Mortgage Indicator Score. The Credit Fee in Price rates will be adjusted if a method other than the middle/lower then lowest method is used. Further, notwithstanding the provisions of Section 6303.1(a), Freddie Mac reserves the right to adjust the CS/LTV and/or Indicator Score/Loan-to-Value Credit Fee in Price rates for a particular Seller or Sellers on the earlier of 30 days written notice or the day immediately following the Required Delivery Date of the Master Commitment if we determine that the particular Seller or Sellers inconsistently use the permitted methods to identify Indicator Scores for Mortgages delivered to Freddie Mac. See Exhibit 19 for details.

(f) Documenting and delivering Underwriting and Indicator Scores When delivering a Minimum Indicator Score, the Seller must:

• Note the Underwriting Scores, the Indicator Score, and how they were identified, on Form 1077 or another similar document in the Mortgage file
• Retain the source documentation for the Indicator Score in the Mortgage file

               The Seller must deliver the Indicator Score in the ULDD Data Point Loan Level Credit Score Value and must deliver the ULDD Data Point Loan Level Credit Score Selection Method Type as follows:

• "Middle Or Lower Then Lowest," "Middle or Lower Then Average," or "Average Then Average"
• If the Seller enters a usable Credit Score value in the ULDD Data Point Loan Level Credit Score Value, then the Seller must enter a Credit Score method of "Middle Or Lower Then Lowest," "Middle or Lower Then Average," or "Average Then Average" in the ULDD Data Point Loan Level Credit Score Selection Method Type, as applicable
• If the Seller determines there is no usable Indicator Score in the Mortgage file due to insufficient credit information, the Seller must select the valid value of "Insufficient Credit History" in the ULDD Data Point Credit Score Impairment Type, as applicable
• If the Seller determines there is no usable Indicator Score in the Mortgage file due to significant inaccurate credit information, the Seller must select the valid value of "Significant Errors Score" in the ULDD Data Point Credit Score Impairment Type, as applicable

If the Seller does not deliver an Indicator Score for Loan Product Advisor Mortgages, the Seller must enter the Loan Prospector Key Number in the ULDD Data Point Automated Underwriting Case Identifier so that Freddie Mac may use the Indicator Score from the Last Feedback Certificate to determine the Mortgage Indicator Score. If the Seller does not deliver the Loan Prospector Key Number, the Mortgage will not qualify as a Loan Product Advisor Mortgage.

(g) Credit Fees in Price for Mortgages with certain Indicator Scores and certain Credit Scores A special Credit Fee in Price will be assessed and billed to the Seller in conjunction with the sale of all Mortgages with certain Indicator Score and Loan-to-Value combinations. The Seller must refer to Exhibit 19 for information on the Indicator Score/Loan-to-Value Credit Fees in Price and other Credit Fees in Price.

A special Credit Fee in Price will be assessed and billed to the Seller in conjunction with the sale of Loan Product Advisor A-minus Mortgages, other Caution Mortgages, and Non-Loan Product Advisor Mortgages with certain Credit Score and LTV combinations. The Seller must refer to Exhibit 19 for information on the CS/LTV (A-minus) Credit Fee in Price and other Credit Fees in Price. Credit Fees in Price are paid in accordance with the Credit Fee in Price provisions outlined in Chapter 6303.