Making Financially Inclusive Decisions In Mortgage Lending

Credit reports and traditional credit scores are a mainstay of consumer lending, but Fair Credit Reporting Act (FCRA)-compliant information that is not included in traditional credit report data, such as income and employment data, has the potential to help responsibly expand consumer access to credit opportunities and support a more inclusive economy. In addition, leveraging this type of alternative data can help mortgage lenders make loans available to more worthy homebuyers.

When potential responsible borrowers are shut out of the mortgage process because of a low credit score, it’s a lose-lose-lose scenario for those borrowers, their potential lenders, and the economy. Building a more inclusive set of financial practices helps bring more consumers into the financial mainstream. Their full participation in the economy and better access to credit can mean more consumer spending, spurring economic growth.

Mortgage Lenders Can Play a Key Role in Removing Barriers to Financial Inclusion

More than 77 million consumers are excluded from access to credit because of their thin or “invisible” credit files.^[1] Many of these individuals with thin or no credit score are Black, Hispanic, or live in areas deemed credit insecure and lack formal credit opportunities. However, just because they have no or minimal credit history doesn’t mean they aren’t potentially credit worthy. With additional data — particularly income and employment data —  many of these individuals could be considered for mortgage loans. Greater visibility with income and employment data can also help lenders:

• Bring thin file consumers into the financial mainstream to fully participate in the economy, such as by helping members of marginalized communities achieve homeownership.
• Transform how they assess borrower credit and risk, thereby helping to create fairer, more inclusive lending systems.
• Better accommodate thin and no-file consumers’ unique needs, provide better customer service during loan servicing and possibly even grow their business by opening the door to say “yes” to more borrowers.

Without the Right Data, Lenders May Decline Qualified Applicants

Knowing a mortgage applicant has a job and consistent income can provide mortgage lenders with increased confidence when assessing that person’s ability to pay. It can also provide critical debt-to-income information, which, when combined with traditional credit scores, can have a legitimate role to play in evaluating risk. But when mortgage lenders only rely on consumer-supplied data, such as W-2 forms, estimated income, and paper pay stubs, they can’t guarantee that the information in their decision process is not incomplete or possibly even altered by the applicant.

Automated technologies, such as digital income and employment verification data sourced directly from employers and payroll providers, can bring certainty to the lending process. The speed of delivery and the quality of the data source can also help mortgage lenders make quick and consistent lending decisions. Each originator reviewing a loan application may bring an individualized approach to the process. For example, some reviewers may ask for more data up front, while others may make decisions based on limited data, leading to inconsistencies in decisions within one lender.  Mortgage lenders can instead automate parameters within their decision processes to pull the same data sets for each applicant, thereby demonstrating that lending decisions are made using a consistent procedure applied to everyone. Removing barriers to financial inclusion isn’t something mortgage lenders can do unilaterally. To succeed, the effort must also lean on third-party partners who can help streamline their efforts.

Seeing Applicants as More Than A Credit Score

While credit scores remain a strong indicator of financial reliability, evolving economic trends have resulted in alternative loan decisioning data becoming even more critical in helping mortgage lenders assess borrowers. Mortgage lenders won’t want to miss out on servicing a viable borrower, all because of a few hiccups in their credit journey that may have led to a lower credit score. Mortgage lenders that recognize prospective borrowers as more than just a credit score will be able to say “yes” to more untapped demographics of qualified borrowers, helping a broader community take the next step in their homebuying journey.

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^[1] Equifax Data and Analytics, 2022.