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FICO: How to serve the credit invisible even if the GSEs don’t change credit-scoring models

The rise of alternative credit data

Federal Housing Finance Agency Director Mel Watt went on record saying they’re actively considering alternative credit scoring, but it’s going to take time.

While changes to the government-sponsored enterprises’ credit scoring models, at the earliest, are expected to happen in the second half of 2019, this leaves the credit invisible market in a lurch when it comes to buying a home until then.

As it stands, there are 25 million totally credit invisible people in America, and there are 28 million who have records at the repositories but don’t get a score, Joanne Gaskin, a senior director at FICO, explained in an interview with HousingWire.

Gaskin expanded on this, saying that credit invisibles tend to be people who are new to the country or Millennials who haven’t started using credit yet. Meanwhile, she said the other 28 million are people who have some credit information, but it’s insufficient to generate a score.

“It would be harmful to generate a score on thin data,” she said.

To help this group of people and all borrowers who need a credit score, FICO, along with its competitors, have pushed the concept of alternative credit data, which includes factors like monthly rent payments or phone bills into a consumer’s score. 

This alternative data in return will help give borrowers a score who previously couldn’t.

Even though alternative credit data is still a couple years away for Fannie Mae and Freddie Mac, Gaskin explained how this data can help borrowers who are looking to buy a home now.

FICO’s newest credit scoring model, FICO Score XD, which leverages alternative data sources to assess otherwise unscorable consumers, is mainly being used and tested in unsecured lending, i.e. credit cards.

By starting out with a credit card that does look at alternative credit data, Gaskin said, “It creates a pathway to traditional credit to be considered for a mortgage.”

“This helps allow people to be considered for a mortgage,” said Gaskin.

She also noted consumers need to build up their credit prior to applying for a mortgage that way they have a credit score.

As for when the GSEs will update their credit scoring models, Gaskin said, “From a FICO perspective, we would love to see them move forward with adopting FICO score 9. It’s a more predictive score, and people can qualify in better terms.”

Seller guides currently require the government-sponsored enterprises to use three legacy FICO models—one from each of EquifaxExperian, and TransUnion— each built using different sample dates.

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