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Fannie Mae, Freddie Mac and the U.S. Department of Housing & Urban Development (HUD) are still requiring credit score models based on consumer spending habits from prior to the 2008 mortgage crisis. They are considering a switch to one of the newer score models that factor rental payments and other “alternative credit” accounts into the score, as long as the data is in the credit bureau’s files to be scored, but that’s another issue. While this new score evaluation process continues, there are new developments that allow for mortgage lenders to help consumers get the credit they are due for their rental payment histories, regardless of the score model required to be used.
Over the past few years, there has been an increasing awareness of the importance of rental and alternative credit data (which could be almost any monthly obligation the consumer makes, including rental payment history) and the impact this has on a consumers financial life when it is taken into consideration for a credit score.
Necessity, being the mother of invention and recognizing how long it takes federal bureaucracy to make big decisions, inspired business minds to find new ways to solve some of the problems associated with consumers with no credit scores. This group is often referred to as “credit invisibles,” and have low credit scores due to a lack of traditional credit data. One of these options is bypassing the backlog on upgrading the mortgage automated underwriting systems reliant on decade-old credit scores to help the credit invisibles.
This is a huge development for a lot of consumers. Experian estimates there are 64 million Americans with insufficient or no credit history. A 2014 study by the Corporation for Enterprise Development (CFED), titled, “Treading Water in the Deep End, Findings From the 2014 Assets and Opportunities Scorecard,” estimates that more than half of Americans have credit scores from 500-649. Experian research also reported that the younger Millennial generation has an average credit score of 628, on the fringe of the prime to sub-prime lending cutoff.
As mortgage professionals, you know better than anyone how these findings impact a consumer trying to obtain a mortgage. Loan approval, and/or higher interest rates for the loan if approved, are found in those ranges. On a daily basis, you see the cost of credit invisibles to mortgages, the average lifetime cost of a low- or no-credit score was calculated at $201,712, more than Americans with a good credit score over a lifetime, according to Liz Weston of MSN Money. To most credit invisibles, $200,000 is several years of wages and can kill the upward mobility of an entire family.
To assist in solving this problem, the National Consumer Reporting Association (NCRA) has partnered with industry leaders in developing this new program to assist mortgage lenders in getting those rent payments added to their credit report in a fashion that can be scored, so that Fannie Mae’s DO/DU and Freddie Mac’s LP underwriting systems can use them for loan approval. This is available today from many credit reporting agencies (to find a participating NCRA member, visit NCRAInc.org) and can be completed even when the landlord is not reporting the history on the original credit report.
The Rapid Rent Reporting process to make this happen is similar to that followed by the mortgage credit reporting agency for credit rescore programs. The mortgage credit reporting agency will first have to verify the rental history with the landlord. The information will be sent to Pasadena, Calif.-based Scorewise for the Rapid Rent Reporting program. After further conformations for data accuracy an “open” account (think the traditional American Express card—it is a common example of an “open” account) will be reported with the rental information on the consumer’s credit report. Listed as an open account, this impacts whatever credit score model is used to calculate the consumer’s TransUnion credit file.
While this only impacts the TransUnion file currently, Experian is a potential addition in the near future. The costs associated with this process are similar to those associated with the credit rescore process, only these fees can be directly charged to the consumer (unlike rescore fees) and are a great value for the potential benefits. Rapid Rent Reporting can make the difference in the loan being approved or not, and for some consumers, the lift from the new rental trade line could have the potential to save them more in interest payments each month than the cost of the service.
Earlier in March, the Washington, D.C. non-profit Credit Builders Alliance (CBA), a group focused solely on helping other non-profits assist consumers build credit histories, released a pilot study conducted with the financial support of the Citi Foundation in collaboration with Experian. They worked with eight affordable housing providers to document the credit score impact when adding a rental history record to the file of 1,255 low-income consumers. After isolating the impact of including rental payment history on participants’ credit reports, the CBA found:
►All residents participating in the pilot who initially had no credit score had either a high non-prime or prime score with the inclusion of their rental payment history.
►A large majority (79 percent) of participants experienced an increase in credit score, with an average increase of 23 points.
►A small number of pilot participants (14 percent) experienced no change in their credit score after including the rental trade line, and an even smaller number (seven percent) experienced a decrease in credit score.
►More than half (55 percent) saw an increase average of 32 points. These were participants who had the fewest trade lines and longer rental histories.
It is important to note that individual results will always vary and that there are some distinctive differences in the CBA pilot program and the Rapid Rent Reporting available. The CBA results were based on the added rent trade line going on the Experian file versus the TransUnion file. Another difference is that the scoring model used in the CBA was VantageScore, and the Rapid Rent Reporting process can impact any credit scoring model. Also, note that 21 percent of the consumer files saw no increase or a slight decrease. While every situation is different, the message from all the research has been clear—alternative credit data, specifically rental history data, is very valuable when factored into the decision.
The Policy and Economic Research Council (PERC) an international credit reporting research organization based in Durham, N.C. PERC’s mission is to help the financially underserved, and the group has spearhead many of the largest studies on credit invisibles over the past several years. In conjunction with the findings of the CBA, they reviewed all of the major studies on this subject from the last few years. From the CFED study earlier cited, the Federal Reserve, Consumer Financial Protection Bureau (CFPB), prior PERC studies, and many others, have been published elevating this issue to the forefront. There is also federal legislation pending to try to solve this complex issue. On July 13, Rep. Keith Ellison (D-MN) and Rep. Michael Fitzpatrick (R-PA) introduced The Credit Access and Inclusion Act of 2015, with 14 bi-partisan co-sponsors and counting. The bill has a little different focus, looking at telecommunication and utilities to help build credit, instead of the more untraditional data. At the end of the day, the results were the same, solving the problems associated with the “credit invisibles” through the common consensus of the research that shows the power of alternative data.
Issues like this one have always been an area of concern for NCRA. NCRA is a business trade association with an understanding of credit reporting issues deep into the weeds, along with an understanding of solutions.
In NCRA’s (NAICRA back then) first credit reporting study, the association found that the then new technology tri-merge credit reports would create a loss of this important alternative data. The term “alternative” was not yet coined, and talking about the value of this data back in the mid-1990s was much different than the discussions of today. Nothing like mountains of credit-related fraud and missed underwriting opportunities to change the course. Hopefully, we have learned from those mistakes and can transform into a new business model that can recapture this information into the underwriting process without further delays.
This article originally appeared in the August 2015 print edition of National Mortgage Professional Magazine.