Building blocks to restoring credit
Some credit experts call it the best-kept secret in home mortgage finance. Others say, so what?
Millions of Americans whose credit scores have declined in recent years because of economic stresses could start rebuilding their scores if their rent, utilities, cellphone, insurance and other monthly accounts were reported to the national credit bureaus.
But typically they are not, and as a consequence they fail to show up as positive factors on credit scoring systems such as FICO or VantageScore. These on-time payments essentially go to waste for consumers, even though monthly rents often can be as large as mortgage bills, and years of utilities and other payments are widely recognized as strong indicators of creditworthiness.
Now for the best-kept secret: Under federal law, these unreported accounts need not go to waste. You as a mortgage applicant are guaranteed the right to bring evidence of your unreported on-time payments to lenders, and they in turn are required to consider those records in making a decision on granting you a home loan — provided you request that they do so. If a loan officer refuses, he or she could be open to legal penalties.
Though federal financial regulators generally acknowledge the right to present supplementary data that consumers enjoy under the Equal Credit Opportunity Act, only one, the National Credit Union Administration, has published guidance informing lenders they are required to comply.
Factoring in so-called nontraditional credit accounts not only could provide important help to buyers and owners with recession-scarred scores but could also aid the estimated 35 million to 54 million consumers who don’t show up —or barely show up — in the files of Equifax, Experian and TransUnion, the three national credit bureaus. Many of these are young people with so-called “thin” files with just a couple of credit accounts, and many are minorities.
So where’s the disconnect? Why aren’t more consumers documenting their otherwise unreported monthly payments? And why are loan officers likely to stare at account records and say: Are you kidding? We only look at credit files.
The problem is complex. Almost no one in the consumer finance field has paid much attention to the Federal Reserve’s “Regulation B” that interprets the rules on the treatment of alternative credit. Lenders who know about it don’t want the hassles of sorting through “shoe box” records that may or may not be accurate. Major players in the mortgage market such as the Federal Housing Administration, Fannie Mae and Freddie Mac all say they will accept alternative credit data but have restrictions on what they will consider. FHA, for example, does not permit applicants with low credit scores to boost them by adding positive, nontraditional data.
The credit industry is eager to incorporate accurate, nontraditional information but is ill-equipped to deal with sources that cannot provide large and regular amounts of verified reports.
“The [national] bureaus know that alternative data is highly predictive,” says Barrett Burns, CEO of VantageScore, a joint venture created by Equifax, Experian and TransUnion. “We think millions of people could benefit” if it were collected and loaded into scoreable files. Experian already collects positive rent-payment data on approximately 8 million units in large apartment complexes and incorporates the information into its scores, he said.
But Burns noted that the industry has had difficulty accessing information on utilities payments in some states, and collection of cellphone account records has raised privacy issues. Without accurate information being available in large quantities, he said, it is difficult to assist large numbers of consumers.
Nonetheless, efforts are under way to mine unreported credit data — potentially the untapped shale gas of the mortgage market — and transform it into something useful. A private firm, Trycera Credit Services, has announced an agreement with the National Credit Reporting Association, a trade group representing companies that provide the merged credit bureau reports and scores used by mortgage originators, to independently verify the accuracy of consumer-supplied payment records. Those records can then be provided to lenders as part of the standard credit reporting and scoring information used in mortgage underwriting.
Michael G. Nathans, president of Trycera Credit Services, says the project is just getting off the ground but that preliminary information is available at the company’s Web site, trycera.com. The service will cost $20 to verify rental and mortgage payments, $15 for other verifications. Trycera also offers Visa debit cards that can help consumers document their nontraditional credit payments in a scoreable format.
Of course there are no guarantees that lenders will accept your alternative credit data. But federal law requires them to at least “consider” it — if you ask.