Work Underway to Help Overcome Thin Credit Files

ANNAPOLIS, Md. – Thin may be better when it come to jockeys or magazine models, but a slim credit file poses potential serious problems for consumers when they apply for loans. Take, for example, the member who always pays his bills on time, so he’s shocked when he’s turned down for a mortgage or other loan. The problem is his checks to the landlord, the day care provider and others were never fed into a data system a credit union or other lender can easily tap. There’s no credit score. Even if a lender is willing to make the loan, it will probably be at much less attractive terms than those offered to someone with an extensive, positive track record. Some firms are working on the problem. Pay Rent, Build Credit wants to establish itself as a new credit bureau that will let consumers and small businesses build a file using rent, utility, insurance, self-storage and other nontraditional credit measures. At the same time, Fair Isaac Corp. in Minneapolis is exploring ways to translate that information into a credit score. PRBC was incorporated in 2002, but only launched its service to the public in December, 2003. Michael Nathans, PRBC chairman/CEO, explains landlords don’t relay information to credit bureaus unless somebody doesn’t pay their rent. “Even then, in most cases they don’t report to a credit bureau, they simply take them (the renter) to court to get a judgment. Judgments don’t show up at the credit bureau either,” he points out. “So we think renters, especially the ones that pay on time, are penalized in a way homeowners who pay a mortgage on time aren’t. Homeowners get to build their credit by making on-time mortgage payments. We think renters should too.” Nathans says he’s seeing growing support for that idea. Part of that backing comes from the fact lenders want to do more business with emerging markets, such as recent immigrants, who rent and don’t have other forms of credit. That makes it very difficult to make loans on a cost-effective basis, and impossible to use automated underwriting. Regulators are also interested. Nathans notes PRBC has received a Community Reinvestment Act opinion letter from the Federal Reserve Board signed by Office of the Comptroller of the Currency, the Office of Thrift Supervision and the FDIC approving the idea of financial institutions feeding data into the system. A credit union, for example, can tell members they can build credit when information goes to PRBC. “Lenders are ordinarily the ones who furnish information to a credit bureau,” Nathans notes. “But since landlords don’t feed information to credit bureaus our information comes from banks and credit unions, who we think are a much more reliable source of data.” Online bill payment and new technologies from CheckFree and others, he continues, make it easy to show when the tenant paid the landlord, not just when the landlord got around to depositing that payment. Automated underwriting is thought to be unbiased. Yet Fannie Mae found more blacks were being rejected for mortgages than whites. Nathans suggests the sparse credit files available on many blacks can create the impression of bias even if it isn’t there. At Fair Isaac, research is underway the company believes can help assess credit risk for people who don’t fit neatly into the conventional mold. “We’re as sensitive as anyone to the strengths of credit information for predicting certain kinds of consumer tendencies and behaviors,” says Craig Watts, Fair Isaac communications manager. “We’re also aware that information isn’t always available for all consumers. Estimates vary for how many consumers don’t have credit records at all, or if they do have records, they are very thin files with perhaps only one account.” Fair Isaac sees two challenges. One it considers fairly easy – analyzing information such as rent payments to determine its predictive value and translating that into a score or other tool lenders can use. The hard part, Watts indicates, will be getting the information in the first place. Credit bureaus have created an impressive stockpile of information. But once you get beyond the credit bureau arena, information is scattered, inconsistent and not readily available on a national basis. “We’ve spent a lot of time over the last year or two talking with various providers of nontraditional information and looking for ways to put that into a national database so a lender can apply an algorithm and produce quick decisions that operate just as well in Florida as in Maine or Washington,” Watts says. “Pay Rent, Build Credit seems like an excellent effort. It’s certainly well-intentioned and seems to be gathering steam. We’re hoping that will produce a national data base of rent payments that can be useful,” he says. -