April is financial literacy month, which means consumers will be barraged with articles and programs designed to promote personal finance education. While this typically includes learning how to budget, manage credit cards, pay down loans, and plan for retirement, this month should also be a time for consumers to focus on policy issues that could prevent homeownership.
Many consumers desire to purchase a home. As part of the home-buying process, consumers should expect their credit scores to be pulled. Credit scores determine a loan offer, down payment requirements and interest rates.
What some consumers may not know is that mortgage lenders often sell mortgages to provide liquidity and free up capital, thereby expanding access to loans. Fannie Mae and Freddie Mac (the Enterprises) purchase many of these mortgages, holding 57 percent of the mortgage market. The Enterprises have rules the mortgage lender must follow before they purchase a mortgage. One of these requirements is to pull a Tri-Merge Credit Report as part of risk determination.
The tri-merge model is essential for two reasons: it offers a comprehensive review of a mortgage applicant’s credit risk and it supports greater access to mortgages for those who qualify.
The tri-merge report pulls three credit scores from the three credit bureaus, TransUnion, Equifax and Experian. The scores from the bureaus may be different because they do not receive the same information. Lenders and creditors do not provide the same information to every bureau, so each bureau receives different information to evaluate and score. Of the three scores pulled, the middle score is chosen for risk determination.
However, in 2022, the Federal Housing Finance Agency, the agency that supervises the Enterprises, thought that allowing the option of a two-score report would create competition in the credit market. If only two scores are pulled from two bureaus, known as a bi-merge report, then the bureaus would theoretically compete for accuracy. This places the consumer at a disadvantage.
S&P Global found that consumers with lower credit scores tend to have the largest score differentials. Their report shows there is a 38- to 47-point difference in credit scores between 575 and 675.
To simulate the results of moving from a tri-merge model to a bi-merge model, TransUnion randomly dropped one score, finding that 1.9 million people were no longer eligible for a mortgage. It most significantly affected consumers with scores between 620 and 699.
Consumers who may be at the threshold of qualifying for a loan would be harmed by a bi-merge report. They would be further excluded from an already challenging homeownership market.
Ironically, the primary challenge in the credit market today is the lack of information available. Credit-invisible and credit-thin consumers lack sufficient information in their credit history, either because it is outdated or limited. This prevents access to credit. However, rather than addressing this problem, moving to a bi-merge would further limit the information used to evaluate risk.
This disconnect highlights the importance of financial literacy — particularly in understanding how credit reporting policies directly shape access to homeownership and financial opportunity.
Financial literacy month is a great time to manage personal budgets, plan for retirement, and learn more about financial policy issues, such as those that affect homeownership. Understanding policies like the Tri-Merge Credit Reporting Model are essential for everyone. They should be discussed as part of financial literacy so consumers can assess how the system may prevent them from owning a home.
