The housing market continues to remain strong in the United States, but marginalized communities are still struggling to achieve the classic American dream of homeownership. Key contributors within the mortgage industry, from GSE’s, to lenders, to mortgage collaboratives, to tech providers have demonstrated a commitment to collaboration in addressing the issue, but there is still plenty of work to be done to ensure that homeownership is an achievable goal for more Americans.
A study by the Consumer Financial Protection Bureau (CFPB) revealed that 26 million Americans (or, roughly 8% of the population) are what is known as “credit invisible” (meaning they do not have a credit history) or have credit scores below 668. The CFPB’s research also shows that 19 million individuals are considered “thin file” consumers and have too little data to calculate a traditional credit score. Communities comprised of those that are unable to build solid credit scores or that find themselves in seemingly constant economic turmoil are simply unlikely to thrive and build the generational wealth that is so impactful over time.
While credit reports are one proven tool to help a lender evaluate an applicant’s credit history and reliability, alternative data can be considered for additional insight into one’s financial health. This alternative data, such as rental payment history, utility payment data, and even cell phone and cable bill payment information, can provide lenders a more well-rounded view of the borrower.
Rent, in particular, is an especially relevant indicator of a borrower’s financial reliability, as it is often the largest monthly bill consumers pay. With more than 44 million households currently renting in the United States, inclusion of rent payment history as a part of a loan decisioning process could help more credit invisible applicants obtain a mortgage loan. The main issue is in collecting the data. Until recently, rent aggregators and property management companies haven’t necessarily been encouraged to report payment data. And methods to report the information were lacking.
Recently, the GSEs have taken a stance to encourage rent aggregators to start reporting positive rent payments. Fannie Mae announced a new feature in its automated underwriting system that will allow recurring rent payments to be automatically identified in an applicant’s bank statement data. Similarly, Freddie Mac will start incentivizing landlords who agree to report positive rental payment data. To further encourage reporting, Freddie Mac has also negotiated discounted fees with a software provider that makes the data reporting possible.
Compiling rental history along with credit information can help open the door for more individuals to obtain a mortgage. Proving that payments were sent on time can demonstrate responsible financial management and can be seen as a clear example of how a borrower would pay a mortgage on time. This additional insight could benefit those marginalized communities unable to prove their financial dependability with traditional methods, creating more minority homeowners and ultimately benefiting society as a whole.
Utility data is another valuable alternative payment example that could be used to evaluate “thin file” or “credit invisible” applicants as cable, phone, gas, and electricity are regular charges that consumers routinely pay on a monthly basis. For example, 97 percent of Americans own a cell phone, so nearly the entire country’s population is consistently paying at least one bill on time.
A home represents safety, stability, and success for individuals and families. With a large fraction of the country unable to obtain a mortgage because of low or nonexistent credit scores, our financial system should leverage all of the tools and resources available to them to help more of our citizens achieve the American dream of homeownership.
Jennifer Henry is Managing Director and Group Executive for Government Credit, Capital Markets and Mortgage & Housing Strategy at Equifax. She is responsible for business strategy, executive management and business development for government relations and the Capital Markets business. Henry brings more than 25 years of experience to her position at Equifax, including sales, strategy, product management, operations, technology, and marketing for the mortgage & housing industry. Prior to her position at Equifax, she held leadership roles with First American Mortgage Solutions and Fannie Mae.