New Ways to Evaluate Credit 'Unscoreables'
For some first-time home buyers, credit is a tougher hurdle than coming up with the down payment: These buyers are what lenders call "unscoreables," or they have such thin credit files their credit scores are abysmally low.
Many of them are young, minorities, immigrants or members of ethnic groups that avoid use of the traditional banking system. They end up paying high interest rates and fees, sometimes double the prevailing market charges, if they manage to obtain a loan and buy a house. Or they simply keep on renting, locked out of homeownership by a perplexing, high-tech credit system that discriminates against nontraditional credit patterns.
Congress took up this issue last week, when a House financial services subcommittee conducted a formal hearing on ways to identify and use alternative data -- not collected by credit bureaus -- that could help gauge creditworthiness.
Rep. Michael N. Castle (R-Del.) said that "35 million to 50 million people" in this country "may not have a full credit reporting history" -- or none at all. Yet many of them pay their bills on time and should be treated as solid credit candidates by lenders.
The House hearing focused not only on the types of information that could enable lenders to better understand the actual risks posed by thin-file and no-file loan applicants, but also on some of the breakthrough nontraditional scoring and evaluation programs already available.
High on the list of helpful data that the credit bureaus often do not collect: consumers' utility payments for electricity, gas, water, telephones and cable television. Michael A. Turner, president and senior scholar at the Information Policy Institute, a New York-based nonprofit research group active on credit issues, ranked utility payments as a prime form of credit data for people outside the regular credit system.
Utility payments "are practically universal" and "the sector is highly concentrated, so relatively few potential data furnishers would have to be convinced of the merits of reporting" customer histories. But there's a big roadblock to widespread use of the data: State utilities regulations often restrict or prohibit dissemination of consumers' payment records, said Turner, so the single best data source may be difficult to access without regulatory changes at the state level.
Not so fast, warned consumer advocates at the hearing. Utility payments, especially for energy services, aren't necessarily accurate indicators of creditworthiness, said Margot Saunders, who represented four national consumer groups. In many parts of the country, she said, "current utility protections" for low-income customers actually "facilitate negative payment histories."
She said, "Many of the programs devised to protect low-income households from shut-off of essential utility service" -- heat or electricity in particular -- "do not punish [customers] for late payments. Indeed, in some of these programs, additional benefits are triggered only after payment delinquencies," said Saunders. As a result, utility payment records might inadvertently hurt low-income consumers' credit profiles.
Despite the complexities of coming up with fair and accurate data, several major commercial efforts are well under way. For example, at the end of April, Massachusetts' statewide housing finance agency began using a nontraditional credit scoring system called Anthem that analyzes existing thin credit bureau data along with current and previous rental payment histories, utility payments, insurance premium payments, child support payments and others.
Mark F. Catone, senior vice president of First American Corp., a California-based data firm that developed the Anthem score, told the hearing that persuading state regulators to make utility payment data available to credit bureaus "would result in lowering the number of no-files and thin-files," and qualify many applicants for lower-cost credit.
Fair Isaac Corp., the developer of the FICO score widely used to rate consumer creditworthiness, also is marketing its nontraditional-credit-based "Expansion Score." Lisa Nelson, vice president of Fair Isaac Credit Services Inc., told the hearing that the Expansion Score, which accesses private databases on payday loans, rent-to-buy, rental history and other financial accounts, provides lenders predictive scores on eight out of 10 no-file or thin-file applicants who otherwise would be denied a loan or charged high rates.
Still another breakthrough has been the development of a private national credit bureau that specializes in collecting nontraditional credit data, especially rental histories. Known as PRBC (Pay Rent, Build Credit), the company recently launched what it calls "Bill Payment Scorecard," which rates consumers' performances on payments of child support, student loans, utilities, phones and others.
All three new tools are available -- now -- to mortgage lenders. Those who truly want to provide home loans to creditworthy borrowers who score poorly because they are invisible to the national credit bureaus need only give them a try.
Kenneth R. Harney's e-mail address isKenHarney@earthlink.net.