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."
The 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.
Among 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 reporting agencies.
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," Raneri said.
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.