With the recent release of the Home Mortgage Disclosure Act (HMDA) data, many stakeholders are providing analyses of how mortgage lending occurs in this country. A recent article from The Markup suggests that the industry may be having some tough discussions over the coming weeks and months.
One way the industry could improve its performance with borrowers of color is to update the kinds of data they take into account when underwriting loans. Fannie Mae recently made the bold announcement that they will start taking rental data into account in certain circumstances. This is a strong first step, but there is so much more work to be done.
We not only need to expand the use of rental data in mortgage underwriting, but we also need to bring other kinds of alternative data into the consumer reporting system. Millions of people are successfully paying utility and other bills every month, but too many people don’t get any credit for that. If they fail to pay their bills, however, and the charge goes to collections, that will almost certainly show up on a credit report, having a serious consequence on a credit score.
More market participants need to take advantage of “consumer-permissioned-data” options that credit reporting companies are offering today, giving lenders insights into consumers’ cash flow to help them access credit even if they have a thin credit file.
Most importantly, the mortgage industry can finally begin using credit scoring models from the 21st Century. As I said in a recent op-ed in American Banker, the mortgage industry mostly depends on the FICO Classic model, instead of newer and better models developed by FICO and VantageScore during the last two decades. Just think about how different the mortgage market is today from 1999. But in all that time, the one constant is that a model developed during the Clinton Administration is still the gatekeeper for mortgage lending. It’s time for the mortgage market to enter the 21st Century and embrace new credit models.
As we continue discussing these issues it is important to note that credit scores are empirically derived and do not take into account race, gender, educational attainment, sexuality or other similar factors. Credit scores are an answer to bias in the lending system, as they are a true and accurate reflection of individual financial situations and choices.
Bringing more people into the regulated financial system is the most important task the financial industry faces today. The studies are done and the commitment to do better is there. Now we just need the industry to take action.
-Francis Creighton, CDIA President & CEO