CFPB Wants Feedback On The Use Of Trended Credit Data

Now that “full time with bennies” is starting to become a thing of the past, mortgage lenders need to start coming up with new ways to evaluate borrower creditworthiness.

An increasing number of potential home buyers are now self-employed, which means they cannot present the traditional forms of documentation required to get a mortgage – in particular, W-2s. Some of these so-called “thin-file” borrowers also lack adequate credit history in order to get underwritten for a loan. Yet, many of these same borrowers can demonstrate that they have adequate income to handle a mortgage, mainly because they are paying all of their other bills – rent, utilities, car payment, credit cards, etc. – on time.

As a result, lenders are looking at the potential for using “trended credit data” or data sources that go beyond traditional FICO scores and W-2s in order to determine creditworthiness.

In response to this, the Consumer Financial Protection Bureau (CFPB), which is also interested in finding new ways to expand credit to underserved borrowers, is seeking public feedback on new ways to expand credit for consumers. This includes “tapping alternative data sources, such as bills for mobile phones and rent payments, to make lending decisions,” the bureau says in a release.

“Alternative data from unconventional sources may help consumers who are stuck outside the system build a credit history to access mainstream credit sources,” Richard Cordray, director of the CFPB, says in the release. “We want to learn more about whether this non-traditional approach can offer opportunities to millions of Americans who are credit-invisible and how to minimize any risks in how this information is used.”

The bureau estimates that 26 million Americans are “credit-invisible” – meaning they have no credit history with a nationwide consumer reporting agency.

Another 19 million “thin-file” consumers have a credit history that has gone stale or is insufficient to produce a credit score under most scoring models.

Basically, what the bureau is exploring is the potential development of a new scoring model that could “make it easier for a borrower to qualify for a loan.” Such a model would use “alternative data,” such as bill payments for mobile phones and rent, as well as electronic transactions such as deposits, withdrawals or transfers.

This use of trended credit data is certainly not new: In October, Fannie Mae announced that version 10.0 of Desktop Underwriter would offer support for trended credit data, basically setting the stage for widespread use in the mortgage industry.

This was followed by an announcement by credit reporting agency Equifax Inc. that it was updating its tri-merge credit report with trended credit data.

In January, Equifax released a report showing that approximately 267,000 more mortgage loans could be originated per year if trended credit data were put into use.

Based on annual averages for the past several years, that’s about 4.1% more origination volume per year.

In addition, the use of trended credit data could result in up to 65,000 more home equity lines of credit being issued to consumers annually, Equifax’s data shows.

What’s more, about 1.1 million consumers who might not currently be eligible for an auto loan could become eligible for one, once the use of trended credit data is in place.

All together, about 1.5 million U.S. consumers per year could benefit from the use of trended credit data, Equifax says.


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