Florida Real Estate News –
Can U.S. approve more mortgages without more risk?
WASHINGTON – The U.S. Consumer Financial Protection Bureau (CFPB) launched an inquiry into ways the U.S. can expand access to credit for consumers who don’t have a credit history or don’t have enough data to get a credit score.
A traditional credit history includes a borrower’s debt payments, such as mortgages, credit cards and other loans. Lenders use the score to decide who can get credit and how much it will cost. But some people have no credit score at all, perhaps because they pay cash for everything; and some people have so little credit data that lenders can’t rely on the info to approve a mortgage or other loan.
Most people, however, have other types of information – called alternative data – that could be considered to determine their loan risk, and CFPB is seeking public feedback on the benefits and risks of tapping alternative data sources, which could include mobile phone bills or rent payments to make lending decisions.
“Alternative data from unconventional sources may help consumers who are stuck outside the system build a credit history to access mainstream credit sources,” says CFPB Director Richard Cordray. “We want to learn more about whether this non-traditional approach can offer opportunities to millions of Americans who are credit invisible – and how to minimize any risks in how this information is used.”
The Bureau estimates that 26 million Americans are credit invisible, meaning they have no credit history with a nationwide consumer reporting agency. Another 19 million consumers have a credit history that has gone stale, or is insufficient to produce a credit score under most scoring models.
Typically, a credit score predicts the likelihood the consumer will repay a debt as agreed. A mathematical formula – the scoring model – is used to create the credit score based on payment record, amount of debts and other factors. Each has a certain weight, and a credit score is calculated from this formula. A higher score usually makes it easier for a borrower to qualify for a loan and may garner a better interest rate. Most credit scores range from 300-850. Different lenders often use different scoring models, so a consumer’s credit score can vary from lender to lender.
While the CFPB hopes to expand loan approvals using alternative data, it’s also exploring the risks of doing so, with an eye toward identifying ways that alternative data could be inconsistent, incomplete, incorrect, overgeneralized or biased – flaws that could adversely affect credit access for low-income and underserved populations.
Specific CFPB information requests
- Access to credit: Can alternative data create or augment a credit score by helping lenders better assess consumer creditworthiness? For instance, a consumer without a credit score may still pay bills on time. If lenders know this, will reassure them? And will it do the same if an on-time bill payer has a credit scores less than 620?
- Complexity of the process: Will the use of alternative data make credit decisions more complex for both consumers and industry? Will it hurt lenders who must notify consumers about credit decisions or financial educators helping consumers grasp their credit standing?
- Impact on costs and service: How much would it cost to start using alternative data? Development would include new ways to analyze credit, and new technologies on costs and services in credit decisions. CFPB hopes it might speed up the lending process.
- Implications for privacy and security: Alternative data could be sensitive personal information. Consumers may not know that it has been collected and shared, or how it will be used in the credit process. Would it be more prone to errors? Can consumers correct errors?
- Impact on specific groups: Are there any unexpected consequences in the use of alternative data? For example, members of the military may frequently move, which might give a false impression of personal instability that would affect whether they can get credit. CFPB is also studying the impact on fair lending practices related to a person’s race, ethnicity, gender or other attribute.
The CFPB Request for Information can be found online.
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