BOCA RATON, Fla. - Credit unions may not be tightening underwriting standards to the degree other lenders are, but they would be mistaken to confuse consumers with little or no credit with subprime borrowers, according to one new analysis.
The study, completed by LexisNexis, suggests that consumers with little or no credit history can represent an opportunity for financials to grow.
“What we see happening is that some financials are viewing the underbanked and subprime as the same,” says Tom Brown, VP of Financial Services Solutions for the LexisNexis Risk Information and Analytics Group. “Underbanked does not equate to subprime and it’s unfortunate that the two groups are looked at as interchangeable.”
LexisNexis completed a study last year that evaluated the underbanked and determined that 50- to 70-million Americans either have no credit history or a very “thin” credit file. The study examined information from the LexisNexis public records database, which covers more than 400 million consumer identities in the U.S. Among many factors, the study examined residential stability, assets, payment histories for utilities, and derogatory events, such as bankruptcy filings.
“There is a misunderstanding that due to the lack of information on the underbanked that these are individuals who do not have substantial purchasing power,” Brown said. “There are many pockets of consumers who have very strong credit quality that have been excluded from the traditional financial economy. Anyone who is scared away from the underbanked because they believe they are subprime is missing a significant opportunity.”
Brown explained that the study showed that individuals with no credit history – while they do not have a similar asset level of those with a thick credit file – have “surprising” assets. Approximately 5% own homes – 12% valued more than $500,000 – and 26% own cars. They tend to be older, between 41 and 60 years of age, and the percentage of individuals holding a professional license is the same for those with no credit history and full-file individuals.
“Cosmetologists were at the top of this list, and they were at the top for those with no credit history and those with a thick file,” Brown said. “Many are in healthcare, including nurses and doctors.”
The opportunity for credit unions, Brown advised, is not to go out and seek the underbanked but to pay attention to those individuals when they walk into the CU. “Keep in mind, one of the main concerns with our economy now is the tremendous debt load consumers carry,” Brown said. “The underbanked don’t have debt and they can represent individuals who are potentially lower risk.”
To assess risk, Brown recommends using alternative methods to “score” those with no credit history. LexisNexis offers a RiskView product that performs similarly to alternative credit bureaus, providing credit analysis based on non-traditional information such as property deeds, liens, personal property titles, tax records, rent and utility payments, and instances of derogatory events.
“We are not making a broad-brush statement that either those with no credit history or a thin file are creditworthy,” Brown said. “We are saying that you can assess the risk in line with the credit union’s policies. There are good individuals and bad, just as there are with those with a thick credit file.”
