Just how much could the use of trended credit data in the underwriting of mortgage loans benefit lenders and consumers?
According to a report from credit reporting agency Equifax, approximately 267,000 more mortgage loans could be originated per year. 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 (HELOCs) being issued to consumers annually.
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.
Basically, the use of trended credit data is a way of opening up the credit box for more consumers – in particular, those who have been “shut out” of the mortgage market due to stricter underwriting standards that came about in the wake of the Great Depression.
Trended credit data takes into account a borrower’s payment patterns and offers a historical perspective of specific payment behavior – including scheduled payments, actual payments and past balances.
Increasingly, lenders are using trended data in order to underwrite loans for “thin file” borrowers – which are borrowers with little to no established credit or borrowers who are self-employed and, thus, don’t fit the traditional underwriting models used for W-2 wage earners.
Most lenders are using a two-year, granular view of this data in order to help them more accurately predict borrower behavior. Typically, this trended data is used alongside a consumer’s traditional credit report. Fannie Mae started using trended credit data in September 2016.
“Giving weight to how borrowers pay off credit debt puts more power in their hands to manage their credit evaluation,” says Peter Maynard, senior vice president of global analytics at Equifax, in a statement. “New ways of assessing consumer credit behavior through unique insights is something we are continuing to develop at Equifax, and opportunities to expand credit to consumers and mitigate for risk for lenders make these types of approaches solid ones for the entire marketplace.”