Alternative Credit Scoring Would Boost Mortgage Lending

by Mike Bevel, CollectionIndustry.com

Used to be, one needed a pretty substantial credit history on file in order to qualify for loans without interest rates in the double digits. New American citizens, especially Latinos, were long considered “debt-averse” and thus found themselves on the wrong end of mortgage loan applications.

The financial community has started paying attention to this pool of potential home owners. if mortgage lenders were to use alternative credit-scoring models that factored in rent, utility and other types of payments that are not reported to the national credit bureaus, an additional $200 billion in new home loans could be extended to Latino purchasers.

But the credit scoring inadequacy problem extends far beyond Latinos. Some industry insiders estimate that as many as 50 million Americans are impossible or difficult to score because they have minimal information on file at the three national bureaus.

However, growing numbers of lenders and mortgage brokers understand these "thin file" issue and have begun offering at least one of several alternatives to traditional credit scores.

Anthem, developed by First American CREDCO, the credit data subsidiary of Santa Ana-based First American Corp., evaluates whatever information on an applicant may exist in the files of the Big Three national bureaus — Equifax, Experian and TransUnion. Then it mixes in information collected by CREDCO from other sources. These include regular child-care payments; phone, electricity and other utility payments; current and former rent payments; plus personal credit data from businesses that do not report to the bureaus — small local retailers that extend credit, payday lenders, rent-to-own companies, etc.

This produces an alternative credit file that can then be scored. First American CREDCO says its scores accurately predict borrowers' risk of future default. Better yet, alternative scoring allows lenders to cut mortgage rates, down payments and fees for people with solid — albeit nontraditional — credit backgrounds.

All spells good news to banks looking to deepen their lending pools to previously harder/impossible to score borrowers.