Alternative Credit Reporting Data: How It Can Benefit Working Families
When used in the right way, alternative data— or information that is not usually reported on mainstream credit reports—can change the lives of working families. This data can include rent and utility payments, records of paying insurance bills or regular child care payments. Unlike mortgage or credit card payments, these non-traditional payment histories are often not reported and are therefore not used to help calculate a credit score.
It is important to point out up front that not all alternative data is helpful for these families. Indeed, some data could be harmful for consumers and even potentially beneficial data could be damaging if used in an unsafe manner. With this said, the sensible use of certain types of alternative data – used in the right way with the right safeguards - can help low- and moderate-income families build assets, such as purchasing a home or starting a small business. CFED’s comment letter responding to the Consumer Financial Protection Bureau’s (CFPB) Request for Information (RFI) about the use of alternative data in the credit reporting market explores what data options make the most sense for working families.
Not having a solid credit history has significant implications for a person’s financial stability, not to mention a host of other potential consequences, like whether a person gets a job or is offered an apartment. It can leave a consumer unable to get a loan, or it may make it so the consumer can only secure a high-cost loan that drains their wealth. High-cost credit and unaffordable loans also compromise a consumer’s ability to save and makes them more reliant on predatory financial products, such as payday loans.
Evidence exists that, if done prudently, the reporting of certain types of alternative data can open the door to safe and affordable credit for the 45 million consumers in this country – many of whom are low-income households or households of color – who either have no credit or have too little information on their credit report to generate a credit score, not to mention the benefits to those whose scores could be boosted with the thoughtful reporting of non-traditional data. CFED’s letter discusses what types of alternative data could be used to create a more inclusive credit market and how best to leverage this data, as well as suggesting some changes to the regulatory landscape that would make the reporting process easier.
Here are some of the core takeaways from our letter:
The Reporting of Rent, Utilities and Phone Payments Are Promising Alternative Data Options. In our letter, we present evidence that the inclusion of rent, utility (electricity, gas, etc.) and phone payments increases the number of people with credit scores and improves scores while remaining safe for consumers and maintaining predictive power. However, for lack of sufficient evidence, as well as concerns about consumer safety and privacy, CFED cannot at this time endorse other forms of alternative data.
Consumers Benefit from Reporting These Data, But So Do Lenders and Service Providers. While the reporting of certain types of alternative data gets more consumers onto the credit ladder, reporting also carries benefits for lenders and entities that report data to the agencies. For instance, it helps lenders become more competitive by increasing the number of potential borrowers who are eligible for loan products.
The CFPB and Other Relevant Government Entities Should Provide Regulatory Clarity and Actively Promote Alternative Data. The CFPB, as well as Fannie Mae and Freddie Mac, should actively promote the careful use of these data, while also maintaining consumer safety and the ability to accurately predict risk.
The financial security of our most vulnerable households is hindered by keeping so many people out of the mainstream credit market, and a promising pathway to this market is through the sensible use of rent, utilities and phone payments. This could generate scores for many previously unscored consumers, as well as building the credit of many more. It puts the dream of homeownership within the reach of more consumers by qualifying them for mortgages on favorable terms and contributes to entrepreneurship by helping people qualify for business loans, which can have a stabilizing effect on neighborhoods and business corridors. In essence, it has the potential to help build an opportunity economy by improving the financial security of those with the least. Check out CFED’s comment letter to the CFPB for more details!