An estimated 15 million people could move into the world of credit thanks to a new credit scoring model that considers alternative forms of credit. But its applicability to home finance is unclear.
FICO scores are a broadly used predictive measure of credit risk that present a consolidated view of how consumers repay credit obligations.
The credit scores utilize multiple scorecards and are calculated using credit bureau data on millions of consumers.
But many consumers
don’t have traditional credit histories and, therefore, don’t have a credit score.
So an alternative model has been created that will consider non-traditional forms of credit such as property records, telecommunications and utility information, according to FICO.
A pilot program announced by San Jose, California-based FICO will
utilize alternative data from LexisNexis and Equifax.
FICO said extensive research by its data scientists found that alternative data can be reliably used to score 15 million consumers who currently don’t have enough credit data to generate FICO scores.
“FICO’s focus is on expanding access to credit; not simply scoring more people,” FICO Executive Vice President for Scores Jim Wehmann stated in the news release. “Our approach also addresses a paradox for people seeking their first traditional credit product; you often need a credit history before you can get traditional credit.”
However, the pilot program is being conducted for the use of credit card issuers, and its applicability to mortgage lending is not altogether clear.
The FICO 9 credit score, which was released last August, reduced the effect of medical and paid collection accounts on credit scores and could have more of an impact on real estate finance.
Mortgage Bankers Association President and Chief Executive Officer David H. Stevens noted in a written statement that FICO 9 was created in response to other efforts like Vantage Score — which is able to score more consumers and potentially create
more prospective borrowers.
“The question now is whether the GSEs and FHA adopt these new models and if so, how long it will take,” Stevens wrote. “Assuming the GSE’s and FHA adopt Vantage Score, lenders will ultimately use them at least for loans that are GNMA or agency.”
In addition, according to Stevens,
broader implementation of alternative credit scoring models by other loan origination systems and automated underwriting systems would be needed to expand the market.
But given other massive systems changes that lenders face such as the integrated disclosures that go live in August, he said it’s not clear
how quickly this will happen.
FICO said that the pilot program is expected to be completed in the coming months.
