At a recent House Financial Services subcommittee hearing, Representative Michael Castle, R-Del., estimated that there may be as many as 50 million young adults, minorities, immigrants and members of ethnic groups who have not used the traditional banking system and may, therefore, not have established a satisfactory credit reporting history. These consumers end up paying higher costs and rates when buying a house, but may in fact pay their bills on time as well as the strongest of credit scored individuals. The purpose of the hearing was to help identify alternative data, not collected by credit bureaus, that might help gauge creditworthiness.
Michael Turner, president of the Information Policy Institute, a New York based nonprofit research group active in credit issues, noted prime data forms such as utility payments, telephone and cable bills are good indicators of credit worthiness. And “since the utility sector is highly concentrated, relatively few potential data furnishers would have to be convinced of the merits of reporting”, said Turner.
But, there is a roadblock to use of this data - most state utility regulations restrict or prohibit dissemination of consumer payment records, so state regulatory changes would be necessary.
There are other existing “thin” credit data sources that could be used by lenders (although none are currently acceptable as alternative sources by Fannie or Freddie). They include First American Corp.’s Anthem system, Fair Isaac’s Expansion Score and PRBC’s (Pay Rent, Build Credit) Bill Payment Scorecard.
Fannie and Freddie will have to step up to the plate to include such data sources in their AU’s to make a dent in this problem.
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