Credit scores are important to mortgage lenders, and that includes data-driven “crowdfunding” lenders. But the components of these credit scores haven’t changed much over the years, and they generally haven’t included payments to landlords, utilities, and other “routine” vendors of household services – even though some research indicates that such payments are more accurate at scoring individuals’ creditworthiness.
The three major credit bureaus – Equifax, Experian, and TransUnion – all use variations on the credit-scoring model developed by FICO (Fair, Isaac and Company). This model assigns credit scores based on weightings of credits scores, debt burden, length of credit history, types of credit used, and recent searches for credit. However, because the scores rely largely on the reports of credit card issuers and other financial institutions, many Americans – perhaps as much as 25% -- who don’t actively use credit have insufficient information (“thin credit files”) and cannot qualify for mainstream credit.
To remedy this, some observers have advocated for the inclusion of “alternative data” – non-financial payment data such as rent, telecom, and energy utility payments. One research organization, the Policy and Economic Research Council, has proposed that mainstream lenders use alternative data, including payment obligations such as rent, gas, electric, insurance, and other recurring obligations to evaluate the risk profile of potential borrowers.
Credit bureaus are starting to agree. In June 2010, Experian purchased RentBureau, a company that tracks rental payment histories for a portion of the rental market; this data is now included in Experian’s credit scores. Both Experian and TransUnion have recently begun to work with RentTrack, a service that enables tenants nationwide to pay their rents online and have their monthly payment information included in credit reports. And EquiFax has created a consumer services database on individuals’ telecom, utilities, cable and satellite payments, which mortgage lenders can access if borrowers believe those records will improve their chance to qualify for a loan.
Congress, too, has begun to consider whether payment histories on non-loan accounts like monthly rent bills should be included in credit scores. Congressman Keith Ellison (D-Minn.), who co-sponsored this bill, said: “Our current credit reporting system leaves more than 50 million people without a credit score,” said Congressman Keith Ellison (D-Minn.), who co-sponsored the “Credit Access and Inclusion Act” this past summer. “Including more data in credit reports will make it easier to get and improve a credit score.”
What does this mean for the real estate industry? In one study published by Experian, among a group of renters in government-subsidized housing who had no credit history, 59% of that group had prime credit scores once rental history was added in. For the rest of the sample (those who already had a credit score), 74% of the people saw an increase in their credit scores when rental payments were taken into account. And in a PERC and Brookings Institution study, the number of minorities approved for loans was 21% to 22% greater when energy utility payments were fully reported in credit files.
It is now several years since the Great Recession reached its nadir, and many households have finally stopped deleveraging; mortgage debt bottomed out in the middle of last year and is now rising again. This improvement in the mortgage credit markets has not, however, stoked the economy as much as many had hoped. First-time homeowners, for example, are still “missing in action” in the home purchase market, many of them in part because their credit scores don’t make the grade.
The new wave of data-driven mortgage lenders are increasingly reliant on credit scores and other data points that can indicate a borrower’s creditworthiness. Adding new types of data, like rent, to credit scores could well provide a truer assessment of a borrower’s credit profile. Recent studies seem to show that the inclusion of such alternative data could help many borrowers -- as well as the economy as a whole.