New Methods Recommended for Establishing Credit Histories

By Catherine Hubbard, CCH Washington Staff Writer

With up to 50 million individuals in the U.S. thought to be lacking a traditional credit risk score, new methods for building credit histories for such consumers need to be examined, the House of Representatives' Financial Services Subcommittee on Financial Institutions and Consumer Credit heard on May 12, 2005.

Possible new sources of credit history information include monthly rent, electric, gas, cable, telephone, wireless, rent-to-own, or day-care payments. In an analysis of the potential costs and benefits of including alternative data in consumer credit reports, the Information Policy Institute, a non-profit, non-partisan research group, reveals that utility and telecom data is most likely to be useful for those consumers with little or no credit history. These sectors, according to the study, are concentrated and have incentives to furnish data.

Non-traditional data is also very unlikely to negatively affect the credit scores of most Americans, the study found, as serious negative information is already reported by utilities. Meanwhile, the study added that prospective data providers need regulatory clarity concerning data sharing and would benefit from affirmative clarification from regulators.

Margot Saunders, an attorney at the National Consumer Law Center, told the hearing that if the new data and scoring systems are built and used appropriately, then the potential benefits to consumers are significant. "However, because of the way that credit data and scores are being used in the marketplace, if these systems are built incorrectly or used inappropriately, the dangers to these consumers could be devastating." She added that this danger is compounded by the fact that many Americans do not have any understanding of how credit scores are developed and used.

Bank of America's Gwen Thomas, senior vice president for consumer real estate, said that providing alternative sources of data such as rental and utility information to the current mortgage lending process could greatly benefit a broad range of multicultural and low- to moderate-income consumers. "But in the highly regulated environment we operate in, we have to find the right balance between compliance and expanded access."

Thomas noted that while Bank of America has developed processes to address the needs of individuals without traditional credit reporting history, these processes are highly manual and have the potential to sacrifice the integrity of the data.

Meanwhile, Lisa Nelson, vice president of business operations at Fair Isaac Corporation, noted that her organization had recently introduced the 'Expansion' score, which utilizes alternative credit data rather than traditional data. Nelson said early results conclude that the Expansion score enables lenders to score and underwrite a high proportion of the growing credit-underserved market.

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Posted May 13, 2005.