Lenders expand borrowing with new credit reporting
Whether buying a home in the booming Houston real estate market or anywhere else in the U.S., chances are, buyers will seek out a mortgage to do so. But without enough information regarding their ability to make payments on time and in full, financial institutions will be hesitant, if not unwilling, to extend a loan their way. However, using new credit research techniques, homebuyers are finding it easier to get approved for a mortgage compared to recent years.
As little as four years ago, the situation was very different for many prospective U.S. homeowners. But in late 2016, a report from the federal Office of the Comptroller of the Currency found that lenders had been extending more home loans to borrowers every year since 2012. The OCC also found that around 24 percent of U.S. banks had introduced new loan products in 2016, another sign that market confidence was increasing rapidly.
While economic forecasts have been looking brighter, the prevailing sense of optimism may not explain the entire phenomenon. Indeed, according to the OCC report, banks were loosening underwriting restrictions while also relying less on costly risk-aversion tactics like derivatives and loan securitization. In essence, the OCC found, U.S. lenders were gaining genuine confidence in the real estate market.
Some of this might be explained by the new methods some financial institutions are using to assess credit risk. While credit scoring metrics have been common for years, credit reporting services are expanding the scope of their research to include a more comprehensive picture of a potential homebuyer. Where banks had traditionally leaned on verifying income through bank statements and looking into records on defaults or late payments, they are now adding unconventional metrics like data from cellphone billing, rent checks and more.
The Consumer Financial Protection Bureau announced Feb. 17 that it was seeking feedback from consumers on these new credit reporting methods. By some accounts, these alternative sources of credit data could help otherwise unqualified borrowers prove their creditworthiness. At the same time, some may see it as an additional, unnecessary intrusion.
"These innovations could expand access to credit, especially for people with thin credit histories," the CFPB wrote. "But like any innovation, there may be risks and unintended consequences, too. We're looking into the promises and pitfalls of these innovations and the steps players in this market are taking to harness the benefits while managing the risks."
Details on alternative credit data
Legacy credit monitoring bureaus like Fair Isaac, TransUnion, Equifax and Experian have joined financial technology upstarts in developing new credit scoring models. The New York Times reported on a few notable examples:
- Fair Isaac's FICO Score XD integrates billing history from cellphone and cable service providers in assessing a borrower's credit health. It also digs into public records for information on things like property taxes or rent payments.
- TransUnion's CreditVision Link model, introduced in 2015, integrates alternative data like a consumer's checking account history, or how frequently they have changed addresses in the past.
- Approximately 100 other lending institutions, from credit card companies to automobile lenders, use a new credit reporting model or have developed one of their own in recent years, according to The Times.
Lenders see this as a win-win for consumers and financial institutions. Even CFPB Director Richard Cordray noted that while many banks will not approve a mortgage for anyone with a credit score lower than approximately 620 (out of 850), they might be more apt to do so if the applicant demonstrates strong alternative credentials. On the other hand, Cordray said, the extra data could just as easily work to the detriment of a borrower qualified under conventional metrics.
The takeaway for the average consumer is nothing to be alarmed about. As usual, anyone considering applying for any kind of loan in the near future is encouraged to take a look at their free credit reports, keeping an eye out for any errors or omissions. In addition, many credit card companies and other services now offer periodic credit checks for little or no cost.
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