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Senate Legislation Moves Credit Scoring in the Right Direction

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A new bipartisan bill was introduced on Tuesday to expand consumer access to housing loans through the use of alternative credit data.

A new bipartisan bill was introduced in the Senate on Tuesday to expand consumer access to housing loans through the use of alternative credit data. The bill, sponsored by Tim Scott (R-S.C.) and Mark Warner (D-V.A.), would require the Federal Housing and Finance Administration (FHFA) to create procedures that allow Fannie Mae and Freddie Mac to consider alternative credit scoring models when evaluating mortgage applicants.

Traditionally, government-sponsored enterprises like Fannie Mae and Freddie Mac only rely on the FICO score, which only includes payment history on credit cards, mortgages and other loans, leaving 26 million Americans with no credit history and another 19 million people with insufficient credit history to obtain a credit score.

VantageScore Solutions estimates that expanding credit scores beyond FICO with the use of alternative data —  including utility, phone bill and rental payments — could help approximately 7.6 million consumers that are currently unscorable to earn a credit score of 620 or higher. Research also found that alternative credit scores can benefit those who traditionally have the poorest access to credit. Using alternative data would expand mortgage access to 16 percent more African-American and Hispanic households.

Several federal agencies, including the FDIC and the Federal Reserve Board of Governors, have labeled alternative credit scoring as an “innovative and flexible practice” to meet the needs of previously underserved consumers and recommend the use of rental and utility payments. In addition, the bill has already received support from 20 consumer and industry groups.

Not everyone has responded to the bill with the same exuberance. In an emailed statement, FICO stated that “lowering credit scoring standards in an effort to score more consumers does not address the challenge of consumers who do not have any or have insufficient credit bureau data to obtain a robust credit score.”

FICO’s wariness is warranted. Simply lowering the barriers to credit scoring is not enough to actually improve access to housing loans. But it is a step in the right direction. To their other point, allowing the use of alternative credit scoring is not about indiscriminately approving riskier borrowers; it is about removing risk and uncertainty around the mass of existing borrowers who are currently underserved. More importantly, using alternative data does precisely the opposite of lowering standards.

Utility data that is pulled directly from utilities is virtually impossible to fabricate on the side of the consumer, and it represents a solid record of responsible payment history.

The FHFA director brought up an important question when he asked how we would ensure that “competing credit scores lead to improvements in accuracy and not a race to the bottom with competitors competing for more and more customers?” Indubitably, it will be crucial to be cautious when implementing this legislation if it passes, in order to ensure that the alternative credit scoring models introduced are accurate and that the competition does not spiral out of control. That is why the data being used in the models is pivotal; utilizing data like utility or rental payments will be more accurate than data like social media history.

Other doubts raised around the legislation include the argument that incorporating alternative data could harm consumers who already have credit scores. It is important to note that alternative credit scores are specifically created for consumers who are not able to obtain a traditional credit score; consumers who have existing credit scores have no reason to go through the process of acquiring an alternative credit score.

Regardless of the bill’s outcome, the change would not be implemented until 2019 at the earliest, according to Melvin Watts, director of the FHFA. In the meantime, the smartest thing for businesses to do is get ahead of the game and start investing in alternative credit scoring models. As the Urban Institute stated, “the updated models have already been developed; it’s time to conclude the ongoing studies and modernize the system.” Those who are unwilling to evolve past the rigid structure of FICO will inevitably fall behind.

Utility and phone bill payments are among the most reliable data points used in alternative data scoring models. Want to learn how to power your alternative credit scoring model with timely and accurate data accessed directly from utilities? Contact us today. 

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