Progress on Standards in Alternative Credit Data

Payment Reporting Builds Credit Inc., which runs a repository of alternative credit information, and the National Credit Reporting Association have taken steps to preserve the use of nontraditional data to evaluate consumers with little or no traditional credit history.

For years, lenders and secondary-market investors have experimented with loan programs for consumers with little or no traditional credit who are evaluated using alternative data, including rental and bill-payment history. But according to Payment Reporting, in recent years these loans have performed poorly because the data is volunteered by the consumers and is therefore more susceptible to fraud and inaccuracy than traditional credit data.

An agreement announced Tuesday between Payment Reporting and the trade group seeks to standardize procedures for lenders that manually underwrite loans using alternative data, and puts audits in place to ensure accuracy and prevent fraud. The trade group represents 95 of the 120 credit reporting agencies that report mortgage underwriting data to the Federal Housing Administration, to Fannie Mae, and to Freddie Mac, including TransUnion LLC, one of the three biggest agencies. The other two, Experian Group Ltd. and Equifax Inc., are not members.

Michael Nathans, the founder and chairman of Payment Reporting, said “there has never been anything in writing that instructs a verifier what to do and how to do a verification. The industry is really welcoming the notion that there is finally some set of standards for doing this work.”

From now on, only payments manually verified according to the new protocols will be accepted in Payment Reporting’s reports or in its credit repository, which consists of 385,000 records. Mr. Nathans said he plans to hire an independent auditor to review his company’s data on a “sampling basis.”

The protocols went into effect March 1.

Mr. Nathans said his Annapolis, Md., company had encouraged other credit reporting agencies, like First American Corp.’s Credco, to submit consumer data to its repository to help thin-file borrowers build credit.

Also Tuesday, Experian said it had started an Emerging Credit Score for the underbanked, which uses alternative data points provided by eBureau of St. Cloud, Minn.

With the addition of Experian’s Emerging Credit Score, all three bureaus now offer an alternative credit score for thin-file borrowers. Fair Isaac Corp. also sells an FICO Expansion score, which accepts Payment Reporting’s data.

Experian, Equifax, and TransUnion offer an alternative to the FICO score through VantageScore Solutions LLC., a joint venture.