Research Warns of Costs in Moving from Tri-Merge Mortgage Standard
New research from Andrew Davidson & Co. demonstrates that shifting away from the tri-merge credit report standard in mortgage underwriting could harm consumers and investors. The study argues that using a bi-merge or single-report standard may lead to less accurate mortgage pricing and qualification, creating added uncertainty in the market.
- The tri-merge standard combines credit reports from the three major bureaus—Equifax, Experian, and TransUnion—into a single report for lenders. Mortgage lenders traditionally use the middle score of the three to determine a borrower's interest rate and loan eligibility. - In October 2022, the Federal Housing Finance Agency (FHFA) announced an initiative to allow a bi-merge standard, requiring reports from only two of the three bureaus. The stated goal was to reduce lender costs and promote competition among the credit bureaus. - A key concern with a bi-merge is that not all creditors report to all three bureaus, which could lead to an incomplete assessment of a borrower's credit history. This might result in credit-worthy applicants being denied or, conversely, riskier borrowers being approved. - Research from TransUnion projected that a shift to a bi-merge system could make two million consumers ineligible for a mortgage backed by Government-Sponsored Enterprises (GSEs). The same study found that affected borrowers could face an additional $6,600 in interest payments over the lifetime of their loan. - An analysis by Equifax found that missing data from just one credit bureau could cause nearly 28 million consumers to drop into lower credit score bands and could make another 10 million "unscorable." - The move to a bi-merge option is part of a larger FHFA plan to modernize credit scoring, which also includes the approval of newer models like FICO 10T and VantageScore 4.0. These models are intended to be more predictive by analyzing "trended" credit data over time rather than a snapshot. - In September 2023, the FHFA clarified that while the new minimum requirement is two credit reports, lenders will still have the option to use all three (a tri-merge). The implementation of the bi-merge requirement is scheduled to align with the broader transition to the new FICO and VantageScore models.
