Last week, Fannie Mae announced that in September it would begin allowing lenders to take rent payment history into account when underwriting mortgages for first-time homebuyers. This is a critical step forward in the fight for financial inclusion.
Many people who have thin credit files are faithfully paying monthly rent bills, demonstrating consistency and ability to pay by allowing access to their bank account data. By taking rent into account and allowing it to factor into the underwriting process, Fannie Mae is creating and expanding opportunity for many people who were previously overlooked even as they kept meeting their financial obligations. Fannie Mae is a key stakeholder in the industry and advocate for affordable, accessible housing and its example should inspire collective action from others across the industry.
While this bold decision is a strong start, we can’t stop at just including rental payments in the underwriting process — there’s real promise in other kinds of data for credit invisibles. Far too many mortgage companies continue to leverage older credit scoring models. The industry needs to consider more advanced credit models that are more predictive and can help drive more financial inclusion.
In 2017, Congress passed the Credit Score Competition Act, which required Fannie Mae and Freddie Mac to start looking at newer credit models.
Recent reports suggest that the companies have since validated those models. What we need to see now is a renewed commitment to continued evolution and modernization, with the goal of greater accuracy and inclusion. This starts with rethinking their approach to credit scores and leveraging these newer models, instead of holding on to a quarter-century-old measuring standard as the foundation of their lending decisions. Think how much the world has changed in the last two decades — especially in how we apply for and close mortgage loans. But we haven’t given the potential homeowners who need help the most access to advances in technology that are being used successfully every day in different areas of the economy.
Alternative credit models are helping lenders across the economy to make lending decisions about more potential customers than ever before. Data science does not just simply stop innovating. Older models such as FICO-Classic weren’t designed to take rent payments into account (the data weren’t even available back then). Newer models do, and those models are being used successfully across the financial services market, except for mortgage lending.
Why does this matter? The older scoring models were based on the information and data that were available at the time. They don’t take into account advances that have become available over the last several decades. So, while other parts of the financial services industry are successfully serving consumers who were previously excluded, mortgage originators have been stuck serving the same limited population they served in the 1990s.
Now is the time to embrace change and innovation to serve the cause of financial inclusion and stop using a credit model that was developed when most people were watching "Seinfeld" on Thursday nights.
