Alternative credit scoring methods for people with a thin or limited credit history
Picture this scenario: You’ve lived in this country for the past 15 years, earned a decent wage, raised a family, always paid your rent, utilities, cellphone bills and other expenses on time, month after month.
But you made little or no use of the conventional banking and credit systems – avoiding bank loans, credit cards, and debts in general.
Now you go to apply for a mortgage to buy your first home, and you’re told: Sorry, but there is not enough information in your national credit bureau files to score your credit.
We’ve got to either charge you an interest rate well above prevailing rates – 9 percent or 10 percent in a 61/2 percent market – or reject you altogether.
That scenario is precisely what large numbers of Latino families now face, according to a new survey.
Nearly one-third said their clients end up paying “subprime” rates on mortgages because their limited credit history makes them appear high-risk when lenders use traditional FICO scores, the dominant credit evaluation method in the highly automated mortgage underwriting process.
Nearly 80 percent said that for every Latino household they help put into a home of their own, they’re forced to turn away two prospects solely because they can’t pass muster under traditional score-based computer underwriting programs.
The chairwoman of the Hispanic realty association, Frances Martinez Myers, estimates that if mortgage lenders used alternative credit scoring models that factored in rent, utilities and other types of payments not reported to the national credit bureaus, an additional $200 billion in new home loans could be extended to Latino purchasers.
Felix DeHerrera, incoming chairman of the association, said that under current underwriting approaches, Latinos often get “penalized for being debt-averse rather than being rewarded for their consistency in meeting financial commitments, even if it is in cash.”
But the credit scoring problem extends far beyond Latinos.
Fair Isaac Corp., developer of the FICO score, estimates that as many as 50 million Americans, of all ethnic backgrounds, ages and incomes, are unscoreable or difficult to score because they have minimal information on file at the three national bureaus.
The credit deck is stacked against them.
They often are forced to pay higher fees and interest rates than they deserve.
But there is good news for many: Growing numbers of lenders and mortgage brokers understand the “thin file” issue and have begun offering different systems of assigning credit scores.
At the annual convention of the National Association of Hispanic Real Estate Professionals this fall, a new guide was released listing hundreds of brokers and lenders around the country who use the Anthem system of nontraditional credit reports and scores as supplements to FICOs.
Anthem, developed by First American CREDCO, the credit data subsidiary of Santa Ana, Calif.-based First American Corp., evaluates whatever information about an applicant that may exist in the files of the national bureaus – Equifax, Experian and TransUnion.
Then it mixes in information that CREDCO collects from other sources.
These include regular child-care payments, telephone, electricity and other utility payments, current and former rent payments, and personal credit data from businesses that do not report to the bureaus – small local retailers that extend credit, payday lenders, rent-to-own companies and the like.
This produces an alternative credit file that can then be scored.
First American CREDCO says their 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.
The goal, according to Mark F. Catone, CREDCO’s senior vice president, is to help “deserving families to secure prime-grade mortgage loans,” even if they score poorly using traditional FICOs.
Fair Isaac offers an alternative-data counterpart to its traditional FICO score, known as the Expansion score.
New Hope For Borrowers With A Thin Credit History (Hartford Courant)
Picture this scenario: You’ve lived in this country for the past 15 years, earned a decent wage, raised a family, always paid your rent, utilities, cellphone bills and other expenses on time, month after month. But you made little or no use of the conventional banking and credit systems – avoiding bank loans, credit cards, and debts in general.
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