Beyond traditional creditMichael Nathanscredit reporting, alternative credit data
Consider thinking about the alternative credit data opportunity
this way for a moment: When forming your first household, you
probably started out the traditional way like most of us - paying
about half of your income in rent with no credit history. The vast
majority of households pay for utilities, phone and insurance. Many
also pay for cable, sub-prime auto loans, rent-to-own furniture,
self-storage, day care and many other types of recurring monthly
bills that are not reported to the traditional credit bureaus - Equifax, Experian and TransUnion - unless they are
late.
How is this reality relevant in today's mortgage market? It is
no secret: The conforming mortgage market is showing signs of
entering a contraction phase. The refi boom is over, a new wave of
lender consolidation is underway and many mortgage brokers accustom
to only working with conforming borrowers with so-called
traditional credit histories are wondering if they will be able to
stay in business.
The good news is that there remains a large population of
non-conforming borrowers with solid alternative credit histories
that can be qualified for homeownership by brokers and lenders
willing to educate and market to them. However, the key to
unlocking profits from within this population is to educate before
selling and to advise your prospective customers how to establish
an alternative credit history without having to go through the
time-consuming and tedious process of manually constructing and
verifying their tradelines yourself.
A creative place to begin the education process is to inform
prospective customers in your market and service areas about
Section 202.6 (b)(6) of the Equal Credit Opportunity Act (ECOA)
rules concerning evaluation of applications. This
little-known-about but profound section of ECOA requires that
whenever a credit report is used to evaluate the creditworthiness
of an applicant, any history, when available, of accounts the
applicant is contractually liable for or, on the applicant's
request, any information the applicant may present that tends to
indicate that the credit history being considered by the creditor
does not accurately reflect the applicant's creditworthiness, must
be considered.
To their credit, FHA, Fannie Mae and Freddie Mac have long
permitted mortgage lenders to establish a borrower's credit history
through non-traditional means, including the compilation of
performance on rental payments, utility bills, telephone and
cellular phone services, cable television service and payments to
local stores. For example, refer to Handbook HUD-4155.1 REV-5,
paragraphs two-four, wherein the FHA advises that this practice is
appropriate when the borrower has no traditional credit file with
Equifax, Experian or TransUnion, and a FICO score cannot be
derived.
Service providers have recently arisen that perform manual
verifications of non-traditional tradelines, produce a written
non-traditional mortgage credit report showing individual
tradelines and make available a three digit score.
Pay Rent Build Credit Inc.
(PRBC) is one such service provider that also provides its
non-traditional mortgage credit report reports in an XML data
format, using SOAP technology, allowing its data fields to be
incorporated into most loan origination and automated underwriting
systems. PRBC also enables consumers to self-report up to three
years of historical bill payment data and to then order and pay for
a third-party verification of that data online.
To assure data quality and mitigate fraud, PRBC's verification
ordering processes and procedures separate the customer (whether a
mortgage broker or a consumer, and the verification fees) from the
actual verifier. PRBC verifications are performed by members of the
National Credit Reporting
Association (NCRA), who are experienced Fair Credit Reporting
Act (FCRA)-certified specialists. NCRA members perform PRBC
Verifications using PRBC's agreed upon procedures having standards
that meet and exceed those required by the Federal Housing
Administration, Fannie Mae and Freddie Mac for verifying
non-traditional credit tradelines. PRBC is unique among service
providers because as a credit bureau data repository, consumers may
use PRBC to build an alternative credit report with historical data
as well as by paying their bills each month using a bill payment
service (preferably offered by their bank or credit union) that
reports to PRBC on their behalf. Thus, PRBC gives consumers an
up-to-date electronic credit file that can be accessed under FCRA
and ECOA whenever a credit report is used to evaluate them, such as
for housing, utility hookup, credit, insurance and employment.
Real estate and mortgage professionals know that gaining a
prospect's trust and respect is an important first step in
obtaining his business. It can also lead to referrals within the
community and among their friends and family. Informing potential
customers in your market about how to build an alternative credit
history before they apply can become a useful strategy in gaining
their trust and business. The emerging strategy of using a
third-party service provider to streamline the building and
verification of alternative credit histories for your customers is
also likely to become a more important and profitable part of your
business as the current cycle in the mortgage market continues.
National Association of Mortgage
Brokers Immediate Past President Jim Nabors II, CRMS agreed:
"Increasing homeownership rates in underserved communities is an
important national goal and good business for real estate and
mortgage professionals. NAMB's partnership with PRBC represents an
opportunity to educate millions of formerly underserved consumers
how to qualify for affordable homeownership and to secure their
financial futures."
Michael Nathans is founder and chairman of PRBC. He can be
reached at (410) 280-0048 x208, e-mail
[email protected] or visit www.prbc.com.
