Lenders take new angle at 'risky' borrowers

Got a low credit score? Banks may be seeking ways around that to make you work as a home-loan customer.

By MSN Real Estate partner Oct 8, 2013 7:40AM

Couple meeting with lender (© Doug Berry/Getty Images)By Janna Herron, Bankrate


Shortly after the financial meltdown, lenders of all stripes pulled back their borrowing generosity. Credit card issuers slashed credit limits, while mortgage lenders and auto lenders approved only those with the most pristine credit.


Now, years removed from the credit crisis, lenders are looking for more borrowers but are still shying away from taking on extra risk. The key is finding consumers who are good credit risks, even if they are plagued by marginal credit scores or have no scores at all.



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"Lenders want to grow their business, but they don't want to repeat the mistakes they made before the recession," says Ankush Tewari, director of strategy and market planning at LexisNexis, an alternative-data-mining company. "One of the ways to solve that problem is to look at other data sources to add to the traditional credit-bureau files."

The impact could be huge for the approximately 50 million consumers whose credit files are so thin or nonexistent that they produce no credit score, such as young adults or recent immigrants.


Then there are the millions of consumers who fall in the mushy middle of credit scores, somewhere between subprime and superprime, who could get better rates on loans because of housing stability.

"Adding nontraditional data can increase a lender's approval rate by 5 percent to 15 percent," Tewari says. "They can book more creditworthy consumers and not make offers that are too risky."


What are lenders looking at now?

There are three general categories of this so-called nontraditional data: public records, utility payments and rent payments.


Many public records -- such as liens, judgments, bankruptcies, lawsuits and professional state-issued licenses -- already appear on credit reports from Experian, Equifax and TransUnion and are used to calculate FICO credit scores. However, other types of public records, such as property records and professional licenses, aren't collected or considered.


Professional state-issued licenses -- such as a hair stylist's or electrician's license -- indicate a potential income stream from that profession, Tewari says. That could make people a better credit risk than their credit score indicates.

"In a hypothetical situation, the professional license information may push the consumer over the hurdle and get them approved," Tewari says. Or, "There may be other characteristics, such as property ownership or address stability, that may help get them approved."


Rental payment is another popular category. Experian got into the game in January 2011 when it started to include positive rent-payment data in its traditional credit reports. The newest version of VantageScore, unlike the FICO credit score, will incorporate those data when calculating a score. The VantageScore will also consider telecommunications and utility data if they're present in a consumer's credit file.


"All of these relationships are predictive, just like a credit card," says Patrick Reemts, director of credit-risk solutions at ID Analytics, a company providing repayment history for cellphones, cable and satellite TV.


Reemts says past delinquencies on these accounts predict future ones. The amount of monthly payments also offers credit risk insight: Lower payments are generally lower risk. And how often  consumers open new accounts indicates their stability or instability.

Utility payments, especially cellphone bills, can be especially useful in providing a credit risk profile to people who don't have a credit file at all.


"What's the first thing (most people) do? They get a cellphone," Reemts says. "It's the first relationship a consumer gets, and we have it from the very start."


Who could be helped by lenders changing their tune?

New immigrants and young adults are among the types of people who have little to no credit history, but who could prove to be great credit risks. Older Americans whose debts have long been retired, along with consumers who have managed their personal finances mostly by checking or cash, also fall into this category. There are about 50 million people who fall into this credit abyss,  Tewari says.


Then there are the consumers who struggled during the recession, either suffering a job loss or a foreclosure, but are now getting back on their feet,  Reemts says.


"Lenders want to lend to those folks again without breaking their portfolios," he says. "And they want to do it in a way that's safe and very consumer-friendly."


A 2011 study by FICO found that 1.5 percent of the 200 million consumers with FICO credit scores were considered "rising stars," people whose scores had risen more than 100 points in 4.5 years.


Lenders want to capture those types of consumers sooner rather than later.

Last, there are the millions of consumers whose credit scores aren't stellar or awful, but who fall somewhere between 620 and 700 on the FICO range. They may qualify for a loan with their traditional score but could receive an interest rate that isn't actually appropriate. For example, someone with a good rent-payment history and stable housing should get a better rate than someone who's transient, even if they have the same score.

"It refines the rank ordering of people in lower credit bands, so some are promoted up," says Eric Lindeen, director of marketing at Zoot Enterprises, a company that helps lenders with credit-evaluation solutions.


What can a consumer do?

The percentage of lenders using alternative data either selectively or across the board on all applicants remains small so far, Lindeen says, although he expects some major announcements about alternative data in the next six months. And none of the lenders that incorporates nontraditional data is advertising its strategy.


That makes it hard for a consumer who knows they have no credit history or a spotty one to target lenders that may give them a second glance. But it also raises the importance of shopping around, whether it's a credit card, mortgage or auto loan, to get the best terms for your credit profile.

"You may be declined by Company A, but you may be a fantastic opportunity for Company B," Lindeen says. "It really depends on what company you're working with."


The rise of this alternative data poses another challenge for consumers: What's in it, and what can lenders look at? Fortunately, the Fair Credit Reporting Act requires that these specialty consumer reporting companies provide consumers a free look inside their files.


It may be worth your time to pull the files at some of the larger data collectors, such as ID Analytics, LexisNexis and CoreLogic, to make sure what they are telling lenders about you is in fact accurate.

"Consumers have a right to access that information, and they should," Tewari says. "Every consumer should know what their credit files look like."


More from Bankrate


Tags: loans
Oct 9, 2013 4:03AM
Blah, Blah, Blah ,Blah......Your credit scores go up when you aquire debt....and no amount of "good or great credit"(whatever you want to call it) is going to separate you from some jackass that doesn't give a rats' **** about paying their bills.  The leaches at the loan shark </iinstitutions> (that's an oxymoron) only care to bring in "new"  business.

BTDT...I watched idiots get loans who had no business getting one,  only to turn around and stick it to the bank....I myself with ceiling high 800+ scores can't get a rate better than these jokers.Banks don't care, just write it off as a loss. Consumers should look at it the same way, just write it off as a loss: tomorrow is another day, go out and get a new loan. Just because there was a "financial crisis" doesn't mean the practices haven't changed. 

It's a game, play it or just get out of the way.......nobody cares....you're dreaming if you think I'm a pesimist.
yeah ,....why don't you lenders look at the "White House" they are a pretty good risk! .?

P O S in the W.H.!!

This is the MOST embarasing  time of my Life to say I am from America

BOTH PArty's should NEVER have put the masses in this position

Oct 8, 2013 10:22PM
As yu can see from al the confusion, lenders state low interest but look at what they charge you to get it.  This is just another day in the playground of real estate and government's ping pong games.  I am still holding out have been for the past 5 years of trying to refinance.  Will stay the course until the water clears a little it is still very murky and no one seems to know their a-- from a hole in the ground.  I will not go under, but I will not pay their ransom to try and refinance, they are all still trying to profit from us little people because of all the mistakes they made, not us.  Not going to get me, I will find a good lender, who can be honest in the paperwork and we can work out something together until that time I am not going to be suckered again, GUARANTEED
Oct 8, 2013 8:51PM
According to my mortgage closer, the banks are repeating EXACTLY what got us into trouble before, and have been doing it all along. And thanks to the IDIOTS passing Dodd-Frank, they have compounded the problem ten fold by making nearly every surviving top ten bank, too big to fail. When we rely on Socialists to fix a problem, it ALWAYS GETS WORSE. Look out below.
Oct 8, 2013 6:20PM
thanks to the housing melt down I lost my @@s  I bought high and had to sell low.. thanks fanny and freddy for doing this to us.. I was one of the ones with 20% down and a conventional loan.. I lost 60.000 on my deal but I didn't default or walk away. just a real expensive lesson learned..i really hate how the gov can influence real estate. Its just another area that they shouldn't get involved in, hell they cant even run their own overinflated asses. so why?  I am just really concerned at what's going to happen next. I hope you all are as well!!! 
Oct 8, 2013 2:37PM
If any of you actually want to learn something about this instead of simply confirming your ignorance by posting here, Google William K. Black, read his articles, watch his videos and read his papers on New Economic Perspectives.
Oct 8, 2013 2:20PM
Lenders don't care about anything but making their 1% or 2% of the loan.  A good loan is just a bird nest on the ground.  When the loan fails they blame it on somebody else, the taxpayer bails them out, the government kisses their a** and they just go on about their business giving the rest of us the finger.
Oct 8, 2013 12:59PM
Zero-down mortgage initiative by Bush is hit
Budget office says plan likely to spur more loan defaults

By Chris Reidy, Globe Staff  |  October 5, 2004


President Bush's weekend campaign promise that he will push legislation allowing for no money down on some federally insured mortgages could cost taxpayers as much as $500 million over four years because of a higher rate of defaults, according to the Congressional Budget Office.

The election-year idea may appeal to those who can't save as fast as home prices are rising. But some financial planners warn that increasingly common no- and low-down-payment programs can be ruinous for some consumers -- especially if home values decline.

If housing prices fall, consumers with little or no money of their own invested in the home are more vulnerable to ending up with mortgages larger than the value

Oct 8, 2013 11:57AM
Yeah right.  Last year I couldn't get a loan.  I have several million in my stock and liquid accounts.  Never been late on any payments.  I have NO debt.  They said my income wasn't there because I own a business.  Lenders are abiding by the rules of the Democrat administration.  It only feeds poor people.  FHA still makes 95% loans to losers with 5% down and 6 months of payments in the bank - these are the people who defaulted last time and they will default again.  Thanks to the Obummer administration.  They discriminate against successful people, period.
Oct 8, 2013 11:54AM
Why don't those with poor credit scores and insufficient income throw Standard&Poors, Fitch, or Moody's a couple of bucks and they will give all the AAA+ rating. Hey they did it for subprime mortgage packages(CDO's) in the past and they told congress it was their opinion.
Oct 8, 2013 11:35AM
This isn't the time to buy or sell a home.
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