FormFree has released Residual Income Knowledge Index (RIKI), a method for measuring consumers’ ability-to-pay (ATP) for mortgages and other loans based on monthly income and spending. When paired with traditional credit scoring models, RIKI offers lenders a more complete understanding of consumers’ creditworthiness and creates homeownership opportunities for those with little to no credit history.
RIKI’s knowledge-engineered rules are informed by human financial experts and are designed to help lenders mitigate risk through a more nuanced understanding of borrowers’ spending habits and ability to save. With a borrower’s consent, FormFree calculates residual income and RIKI by analyzing bank and credit card transaction statements procured directly from the source financial institutions. The technology gives lenders a better understanding of a borrower’s discretionary funds after mandatory monthly expenses (e.g., rent, utilities, loan payments).
In July, San Diego-based Guild Mortgage became the first lender to pilot RIKI with its launch of Complete Rate, a program that provides a more inclusive path to homeownership by allowing consumers with no credit score or credit history to opt in to RIKI’s assessment of their financial data for a chance to qualify for a lower interest rate, lower fees or both.
“Our Complete Rate program, powered by FormFree’s RIKI, helps remove a key obstacle faced by many first-time homebuyers and has allowed Guild to better serve consumers in a challenging interest-rate environment,” comments David Battany, Guild Mortgage’s EVP of capital markets. “By supplementing consumers’ credit scores with analysis of their real transaction data, our groundbreaking approach democratizes the credit decisioning process for those who need it most – historically underserved racial and ethnic groups, consumers with thin credit files and people without traditional full-time jobs.”
RIKI is now available to banks, credit unions and independent mortgage banks (IMBs) across the United States. The rule-based algorithms driving the now-public feature have been painstakingly engineered without blackbox machine learning and tested to ensure RIKI cannot develop unintended prejudices. FormFree’s cash flow analysis also automatically identifies and disregards outliers in a consumer’s income and spending history to ensure that occasional windfalls, money transfers or large purchases do not affect ATP estimates.
“Traditional credit scoring systems are designed to reward a very specific type of borrower: one with a W-2, a strong credit history and a good debt-to-income ratio. Unfortunately, these risk determination methods bar countless mortgage-ready Americans from affordable homeownership,” says Brent Chandler, founder and CEO of FormFree. “RIKI rewards something more basic and uncontroversial than credit history: simply making ends meet. When considered with a credit score, insight into consumers’ ability to pay and save adds an extra layer of certainty when determining borrower risk.”