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Is contract processing right for your business?

Nov 09, 2006

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
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