Between a volatile housing market, high inflation rates and the prospect of a national recession, the current mortgage lending environment is challenging for borrowers and originators alike. For the lenders that prioritize social-responsibility and financial-inclusion initiatives for their loan officers, there is a need for loan decisioning and underwriting to evolve beyond reliance on traditional credit data.
Today’s reality is that evaluating an applicant based on credit alone may provide too limited a view into their actual financial situation and creditworthiness, especially for the consumers with little or no credit history. As a result, these so-called “credit invisibles” and others without a prime credit score can find it quite difficult to access credit. The scope of the issue is significant, with tens of millions of consumers having thin credit files or labeled as “credit invisible,” even though many may be gainfully employed and have income levels that otherwise make them well-qualified loan applicants.
“Fortunately, loan originators now have access to more information, beyond credit scores and DTI ratios, to help them form a more holistic view of their clients.”
Social responsibility within lending promotes equity in underwriting and helps level the playing field among consumers. It also drives deeper financial insights into applicants while bridging gaps in their financial profiles to help minimize risk. Part of the evolution of the mortgage industry to support more socially responsible lending relies on the ability of originators to access expanded types of data used to make loan decisions.
Deterred by debt
For U.S. consumers, debt can be acceptable when it provides a means to fund personal purchases like new automobiles, or to invest in education and training required to unlock new job opportunities and advance their careers. But with today’s steep housing prices and higher interest rate trends, too much debt could present a roadblock to consumers who are exploring homeownership.
Typically, lenders consider a borrower’s debt-to-income (DTI) ratio when evaluating their loan application by comparing their monthly debt payments (such as rent, credit card bills and student loans) to their monthly income.
The ideal DTI ratio to approve a conventional mortgage is 36% or less, with a higher percentage indicating that income is more constrained. This increases the likelihood of the loan having a higher interest rate or the request potentially being denied. But DTI can fluctuate throughout the mortgage process, and some industry leaders have expressed interest in finding new or additional ways to measure a borrower’s repayment ability.
Fortunately, loan originators now have access to more information, beyond credit scores and DTI ratios, to help them form a more holistic view of their clients. By leveraging alternative data (such as employment history, secondary income sources, utility bills, TV and internet bills, or mobile phone and rental-payment histories) mortgage originators can gain deeper insights into a borrower’s actual repayment ability.
More than a score
Alternative data equips loan officers and brokers with avenues to unlock a wealth of additional, relevant financial data that can reveal broader information about an applicant. Most notably, this includes their potential repayment behavior.
Leading examples of alternative data in today’s lending market include income and employment data (encompassing additional sources like part-time jobs and rental-property income); telecommunications and utility payment data; specialty finance data (e.g., rent payments or peer-to-peer payments); and education data. The augmentation of credit decisioning with alternative data helps to provide a deeper understanding of the applicant’s spending patterns and cash flow, allowing mortgage companies to make more informed lending decisions.
These new data sets can also allow consumers — especially those considered to be credit invisible or those with thin credit files — to increase their chances of securing a loan. By helping originators to expand their qualifiers for assessing creditworthiness beyond traditional credit scores, alternative data helps to extend the availability and opportunity for loans to more consumers. It also helps lenders to develop and diversify their lending opportunities.
Consider women and minorities as examples, as these consumer segments historically have had less access to credit. When loan officers categorically overlook consumers with a subprime credit score, opportunities may be lost to grow their client bases. To successfully lend in a socially responsible way, originators must begin to think of alternative data as a valuable tool to enhance and augment credit decisioning while providing a more comprehensive view of each applicant.
Value over time
Despite the wide availability of alternative data sets, as well as digital verification tools, many originators still make decisions that are primarily influenced by traditional credit scores. They dismiss insights that can provide a more detailed profile of applicants and, as a result, potentially exclude otherwise viable borrowers.
Many lenders recognize the lasting, long-term value of building borrower relationships, beyond just that of the initial mortgage. When lending to credit invisibles or borrowers with thin credit files, you can create additional loyal relationships. And for the borrowers who dutifully make their payments on time, over time, their consumer credit score becomes more established and positions them as viable prospects for additional products and services.
For many Americans, the pathway to meaningful, generational wealth often begins with homeownership. Across the mortgage industry, there is an opportunity to help more qualified borrowers gain access to this pathway. Through a more socially responsible approach to lending, mortgage companies can drive greater financial inclusion in a risk-responsible way and affect real, positive impacts in communities across the nation. ●
