The Urban institute's (UI's) Ellen Seidman is reporting on an UI event held last
month to discuss what she terms "overly restrictive credit-scoring
systems." The event featured two members
of Congress, Representatives Ed Royce (R-CA) and Terri Sewell (D-AL) as well as
a panel of representatives from credit scoring and credit bureaus.
The event was held to explore whether new credit scoring
models can help resolve the difficulties young families have "getting their
first foot onto the homeownership ladder."
two congresspersons have cosponsored HR 898, the Credit Score Competition Act.
The legislation, if signed into law, is designed to encourage innovation
in credit scoring by setting up competition among credit scoring systems for
the business of lenders selling loans to the government sponsored enterprises
(GSEs) Freddie Mac and Fannie Mae. Royce observed that there is general agreement that
traditional credit-scoring systems do not serve the needs of homebuyers,
especially younger buyers.
topics discussed by the panel was the National
Consumer Assistance Plan, a series of initiatives launched last year by the three
major credit reporting agencies, Experian, Equifax, and TransUnion, and
intended to enhance the accuracy of credit report and make dealing with the
information contained therein easier and more transparent for consumers. Among the provisions are an expanded period
before negative medical payment data can be reported, access to a second free
credit report to check on error resolution, and disallowing inclusion of
negative information that does not arise from an agreement on the part of a
consumer to pay, such as traffic tickets or government fines.
Mike Trapanese, senior vice
president at VantageScore Solutions, noted that, while credit scores play a
small role in mortgage underwriting, they serve as a 'gateway" to the mortgage
process. They are critical to lender
decisions about considering a mortgage applications and to setting interest
rates and other pricing. Therefore, high
quality, predictive scoring that can be expanded without increasing mortgage
risk will enable more persons to enter homeownership.
Joanne Gaskin, senior director at
FICO agreed with Trapanese that expanded credit scoring models, which might
include information on rents and utility payments, could help previously
unscorable individuals to gain a credit score but a new model would be unlikely
to immediately bring millions of potential homebuyers into the market. Trapanese said there were about 7.6 million
consumers without a credit score who might achieve a score of 620 or more with
the new models and about 3 million of those might have an income and credit
profile sufficient to purchase a median-priced home in their location. Gaskin said that expanding access to credit
would require more nontraditional data from other than the three major credit
Eighty percent of new consumer files
at the credit bureaus belong to consumers who were born after 1982 Experian
vice president Michele Raneri said. Only
4.4 percent of those files start with a mortgage; 64.6 percent start with a
credit card and those consumers begin their credit life with an average score
of 679. This "puts them within range of
qualifying for a mortgage, although a single trade line is insufficient credit
experience to qualify for a mortgage using automated underwriting systems,"
Although the three credit evaluation
representatives on the UI panel were all in favor of adding new data to the
system, all stressed the importance of the data's accuracy and integrity. They pointed to data from consumer checking
accounts as being the most desirable addition. Positive information is now being
added regarding rents and telecommunications and utility accounts to supplement
the negative information already provided by those sources.
But, Gaskin noted, this new data is
still sparse; only about 1 percent of consumer files have rent information, 2.4
percent have utility data, and 2.5 percent have telecommunications data. She
added that some credit card issuers are making low-balance cards available to
unscorable consumers as an on-ramp to scorability. Trapanese said the new data may add "depth" to
consumer files but are unlikely to take someone from being "credit invisible"
to having a credit score.
Last month the three major credit
bureaus announced they would remove tax lien and civil judgement data from
consumer records and prevent addition of new data unless the negative reports
contain three out of four data points to ensure accuracy. Gaskin said that although bankruptcy records
will pass the tests and will be included, almost all civil judgments and half
of the tax liens will be excluded from consumer credit records. This however will have little effect on
credit scores because 92 percent of the affected consumers have other
derogatory information in their credit file.