How Does Missing Consumer Data Hurt Businesses?

Making credit risk decisions has never been more difficult for businesses if they don’t know where to find the right information. Since the spring of 2018, Equifax, TransUnion and Experian have fully discontinued offering liens and judgments data on U.S. consumers. This change occurred as part of the implementation of the National Consumer Assistance Plan, which is the result of a 2015 settlement between these three credit bureaus and 38 states. The lack of liens and judgments intelligence creates a significant decisioning disadvantage for lenders and creditors trying to accurately assess consumer creditworthiness. Often, a lien or judgment can be an early indicator of an applicant’s diminished creditworthiness or other derogatory events, and can help alert lenders to carefully investigate an applicant’s potential credit risk. When liens and judgments information is no longer available, it leaves lenders with an incomplete picture of consumer risk that may expose businesses to costly losses.

Derogatory Data Has Disproportionate Negative Impacts

Current estimates are that about 6% of U.S. consumers have an outstanding lien or judgment against their record. At first glance, depending on your tolerance for risk, this number might make the lack of liens and judgments data on credit reports seem manageable. However, a recent LexisNexis Risk Solutions study confirmed that while consumers with liens and judgments represent a small portion of the population, they actually account for a disproportionate percentage of risk. The research found that consumers with liens and judgments represented 5% of the approved population but accounted for 12% of the accounts that defaulted.

The study also showed that consumers with liens and/or judgments generally are in the segment of the population where accurate decisioning and informed segmentation can have the biggest impact of distinguishing a viable account from a potential charge-off. An incomplete credit profile limits lenders’ ability to differentiate between consumers with similar credit profiles. Without insight into liens and judgments, a business misses out on valuable intelligence that could help identify the next best customer or indicate avoidable risk for a charge-off or loss.

Incomplete Consumer Intelligence Obscures Decision Accuracy

Credit scores that don’t include liens and judgments data create a decisioning information gap that impacts lenders’ ability to accurately understand the risk a consumer represents for their business. In fact, the lack of liens and judgments data artificially inflates credit scores. The data from the study showed that consumers with liens and judgments are overscored by between 20 and 30 points.

Although most consumers with liens and judgments are found in the middle-to-lower scoring quadrants, high-scoring consumers who default represent even costlier risk. High-scoring consumers are not immune to liens and judgments risk, and the study showed that consumers who scored above the 700-plus prime range and have a lien or judgment default at higher multiples than consumers with 700-plus credit scores and no lien or judgment. The default rates continue to track higher as the prime rate increases. Considering prime consumers often take out larger loans, such as mortgage or auto loans, and have greater access to credit, missing derogatory information could add up to costly losses and charge-offs.

Bad Decisions Hit the Bottom Line

In today’s competitive credit market, speed and accuracy are critical competitive differentiators. Strong, profitable performance greatly depends on predicting which consumers represent the best candidates for credit and actively avoiding consumers who increase exposure to risk. The lack of liens and judgments intelligence limits the visibility into the true risk a consumer represents. Credit bureaus have no way of knowing if a consumer has an existing lien or judgment against them, leaving lenders at a significant decisioning disadvantage.

Lending to the wrong candidate exposes businesses to significant losses and charge-offs. When looking at charge-offs, the study found out of a sample of 4,000 loans analyzed, the total balances of liens and judgments that defaulted equaled nearly $116 million. The indirect opportunity costs of being unable to accurately distinguish between consumers in the same scoring band to pinpoint profitable candidates also add up. When factoring in the operations costs of resources dedicated to managing charge-offs and collections, the liens and judgments data deficit translates into significantly diminished revenues.

In the long run, the removal of lien and judgments data from credit reports will impede financial inclusion and significantly increase credit risk. Using reliable alternative data, backed by data linking technology and analytics, will go a long way to fill the void, and companies need to plan accordingly.

Ankush Tewari is Vice President, Credit Risk Assessment for LexisNexis Risk Solutions. He can be reached at 800-953-2877.