Dec 10, 2018 Philip Burgess
A large portion of credit-invisible consumers may soon have the opportunity to secure a home loan, as a recently introduced Senate bill would obligate government-sponsored enterprises Fannie Mae and Freddie Mac to accept alternative credit scores.
Sponsored by Republican Senators Tim Scott of South Carolina and Mark Warner of Virginia, the Credit Score Competition Act would require the two organizations to create new methods allowing them to use scores other than the standard FICO in their residential loan decisions. This could bring the American dream of homeownership to many people, as Sen. Scott pointed out in his press release on the matter.
"Currently, the GSEs are mandated to consider a decades-old credit scoring model that does not take into account consumer data on rent, utility, and cell phone bill payments," the announcement reads. "This exclusion disproportionately hurts African-Americans, Latinos, and young people who are otherwise creditworthy."
Sen. Scott noted that currently, only 77 percent of South Carolinians can be scored based on the models used by the GSEs. By adding alternative scoring methods, that number increases by 16 percent.
Alternative credit legislation
"Approximately 26 million Americans are credit invisible."
According to the Consumer Financial Protection Bureau, approximately 26 million Americans are credit-invisible, meaning they don't have history with a traditional credit reporting agency. Another 19 million are considered unscorable either because they have too little or no recent credit history. Credit-invisible and unscorable consumers are more likely to be black, Hispanic, recent immigrants or millennials.
This isn't the first time such legislation has been introduced in Congress. In fact, the current version of the bill was first brought up in February of this year under the same name. As DS News reported, the original bill was sponsored by Representatives Ed Royce (R-California), Kyrsten Sinema (D-Arizona) and Terri Sewell (D-Alabama).
However, some critics of the bill say it doesn't go far enough. The National Consumer Law Center noted that it doesn't address the income inequality prevalent in many minority communities, MarketWatch reported.
Alternative credit scores incorporate broad data sets to determine a person's creditworthiness. The information reviewed can include payments like cell phone bills, utilities and rent. However, some disadvantaged consumers cannot make these payments consistently, compromising even their alternative score.
Nevertheless, the bill would open the possibility of a home loan to many credit invisible individuals and is a positive first step to assisting the underserved.
The benefits of alternative credit scores
Using alternative credit scores can open businesses up to a wider variety of potential consumers. People who are credit invisible are often responsible with their payments but have never made a major purchase such as a house or car. As a result, they aren't seen by traditional agencies.
Alternative credit reports can return information such as:
- Substitute credit trade lines, like short-term loans and utilities payments.
- Retail bank transactions.
- Bank account closures.
- Bankruptcy, lien, judgment and eviction records.
- Address history.
- Property ownership.
- Identity verification.
With more robust data, businesses can make well-informed decisions regarding a potential customer's creditworthiness and responsibility.