Credit Risk

No Credit Report, No Problem

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In an attempt to control their risk since the financial crisis, many lenders have focused their attention on potential customers with the very highest credit scores and most pristine, exhaustively documented payment histories. The trouble with this strategy is that every institution knows who these customers are and, what's more, most of these people already have a mortgage, a car and all the credit cards they need.

In the last six to 12 months, however, there's been a shift among lenders. Analysts say they now seem more willing to reach beyond this rarefied group.

"They want to keep their good customers and make the pool of potential customers grow, but in a risk-sensitive way," says Aite Group analyst Christine Pratt.

To this end, lenders have become increasingly interested in and more willing to use so-called alternative credit data to find good customers they might otherwise overlook. (Alternative data can include everything from rental payment history to mobile phone bills to years at the same address.)

"There's a realization that they are all targeting the top of the market and it's very saturated, that it's very difficult to get these people to change institutions," says Mike Mondelli, chief executive of L2C Inc., a provider of alternative data for credit scoring. "The economy, while not great, has improved. And they need to grow their business."

Aside from the tens of millions of people rebuilding credit after the financial crisis who may be good customers, there are millions of people without enough data to qualify for a traditional credit score who are routinely dismissed as bad risks. These people might include new immigrants, young consumers or those who don't use credit cards. FICO estimates that 25% of the U.S. adult population, or about 50 million individuals, lack enough traditional credit data to generate a FICO score. Yet they could be worthy customers.

Of course, using alternative data is not novel — credit scoring agencies and financial institutions have long sought and used new metrics. But vendors are responding to the new urgency among lenders with additional tools and services.

Last year, Experian (one of the big three credit scoring agencies along with TransUnion and Equifax) bought RentBureau, the largest credit bureau for the multifamily industry. Earlier this year the company incorporated positive rental data from RentBureau into its traditional credit file. In the past, only negative rental information was available from collection agencies.

According to the National Multi Housing Council, there are nearly 96 million individuals renting who don't get the "credit" they deserve incorporated into their credit scores. "Rental history is the most important factor in determining mortgage payments," says Brannan Johnston, vice president and managing director of RentBureau.

Mondelli says his company recently completed a redevelopment of its scorecard to include positive and negative information on rental check writing and utility payments. FICO, meanwhile, has the FICO Expansion score that includes demand deposit data, phone and utility data, membership club obligation, judgments, liens, bankruptcy and other positive and negative nontraditional data. FICO is always adding to its repertoire of products, says Bradley Graham, senior product management director at FICO.com.

What's critical is that these efforts are reaping rewards for lenders — and consumers, for that matter. Johnston says that since adding positive rental data, 45% of high-risk or unscoreable consumers lifted their credit scores to 600 or higher. Meanwhile, Mondelli says that on average, L2C clients approve 15% more accounts without increasing their risk levels. And Graham notes that 75% of consumers who don't generate a traditional FICO score do generate a FICO Expansion score.

Mondelli says he's seen the most interest in alternative data from credit card companies and those extending unsecured consumer loans. Others note increasing use among auto lenders; Graham says the uptick has been across the board. But whoever is using the data, they tend to be tight lipped.

"Many FIs consider the use of alternative data as part of their competitive advantage and don't necessarily like to talk about it," says Mark Luber, vice president of analytics for LexisNexis Risk Solutions.

Given the competition for new customers, the push for new sources of alternative data is likely. Some institutions are even examining whether social media behaviors — such as using certain keywords or even having certain friends — can be associated with actual credit risks. Such tools are probably years away, yet some entrepreneurs are pushing the envelope now.

The startup Lenddo.com got some funding and publicity earlier this year when it unveiled a reputation score based on the user's network of friends and family. The catch: If you fall delinquent on a loan, Lenddo will notify your friends and family network.

That approach might not pass privacy muster in the U.S., but it's up and running in the Philippines with plans to launch in other emerging markets. In the U.S., other forms of alternative data are certainly here to stay. "We've seen a definite shift," says Luber. "In 12 to 18 months, many types of alternative data won't be seen as alternative."

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Comments (2)
These B2B solutions work well for portfolio management and new account acquisition. eCredable is a Credit Reporting Agency that allows this same population of consumers to demonstrate their creditworthiness by having their information verified (at their own expense), and present a verified credit report that both the consumer and credit rating that the potential creditor can easily understand (A-F).

In this era of "consumer empowerment", we need to pay attention to consumers who are standing right in front of you wanting to give you their business - consumers who are creditworthy, and have the ability to be really good customers.
Posted by eCredable CEO | Tuesday, November 01 2011 at 10:46AM ET
Alternative credit data is more than just rental payment history and utility payments. Consumers have had to find alternative sources of funding when traditional lending is no longer available due to their dropping traditional credit scores. These alternative methods include payday lenders, online lenders, buy here/pay here dealers, check cashers, etc. Lenders need to access the data from companion bureaus such as Clarity Services that, for some years now, have been collecting this information and can tell them what the traditional bureaus fail to provide. A competitive advantage and securing new customers while gaining better insight into the alternative activities of current customers is the way to stay ahead of the game.
Posted by Susana W | Tuesday, December 20 2011 at 11:19AM ET
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