2007 Issue No. 1
Table of Contents

News and Notes

Nontraditional data could help many get mainstream loans, study finds

The use of nontraditional borrower data to evaluate credit risk could help bring millions of Americans into the financial mainstream, according to a recent report from the Brookings Institution Urban Markets Initiative and the Political and Economic Research Council.

The report, titled Give Credit Where Credit Is Due: Increasing Access to Affordable Mainstream Credit Using Alternative Data, reveals how the widespread use of nontraditional borrower data, such as rent or utility payment records, would affect lenders' credit risk evaluations and enhance the creditworthiness of a huge segment of America's population. An estimated 35 million to 54 million American consumers have limited access to mainstream sources of credit because lenders lack sufficient information for evaluating their credit risk under traditional credit-scoring models. As a result, many of these consumers turn to high-interest payday lenders or check cashing outlets to meet their credit needs.

The report's authors analyzed utility and telecommunications payment data from a sample of more than 8 million consumers who have thin or "unscoreable" credit records. They applied a variety of standard credit models to the data and then compared the resulting predictions with actual payment/bankruptcy outcomes observed during a 12-month period.

The results show that when nontraditional payment data are considered in credit risk evaluations, the credit risk profiles of consumers outside the financial mainstream are similar to those of the general population. The inclusion of nontraditional data lowers the predicted rate of default by more than 20 percent among the previously unscoreable borrowers. The predicted rate at which creditors accept previously unscoreable borrowers as customers increases by about 10 percent. Minorities and low-income borrowers benefit significantly, with a 22 percent increase in the predicted acceptance rate for Hispanics, a 21 percent increase for Blacks and a 14 percent increase for Asians. The acceptance rate for those earning up to $20,000 a year increases by 21 percent and the rate for those earning between $20,000 and $29,999 shows an increase of 15 percent.

University launches new Twin Cities mapping tool

The University of Minnesota's Center for Urban and Regional Affairs (CURA) recently launched a new mapping application designed to assist economic and community developers in the Twin Cities region.

Minnesota 3-D (M3D) is an Internet application that maps information on labor, housing and economic development. The application combines more than 90 datasets that are built on geographic information systems, or GIS, technology. According to the Winter 2006 edition of the CURA Reporter, M3D will be an especially helpful tool for planners and policymakers who need to understand the spatial relationship between housing and employment in the Twin Cities region.

M3D is a partnership among CURA, the Minnesota Department of Employment and Economic Development, Minnesota Housing, the Minnesota Department of Revenue, the Metropolitan Council, Ramsey and Hennepin counties, and various neighborhood organizations and community development corporations in the Twin Cities. The project was funded through a $600,000 grant from the U.S. Department of Commerce.

Montana foreclosure prevention campaign wins double honors

A campaign to prevent mortgage foreclosures in Montana received two national honors in late 2006.

The campaign is a partnership between Neighborhood Housing Services, Inc., of Great Falls (GFNHS) and numerous sheriff departments statewide. In Montana, county sheriff departments are responsible for serving legal notices of mortgage foreclosure to homeowners. Under the partnership with GFNHS, sheriff's deputies from a growing number of Montana counties are delivering literature on foreclosure prevention at the same time they deliver notices of foreclosure action. The literature includes contact information for GFNHS’ Foreclosure Prevention Services program. As noted in the December 2006 NeighborWorks Great Falls newsletter, the campaign has prompted a number of homeowners to seek counseling and assistance that enabled them to keep their homes.

The campaign won a first-place award of $1,500 in the 2006 Successful Models in Financial Education Awards program, sponsored by Freddie Mac. It also won first place for innovation in a 2006 foreclosure prevention contest sponsored by NeighborWorks America and the NeighborWorks Center for HomeOwnership Education and Counseling. The honor carries a $2,000 prize sponsored by MetLife.

Regulators revise adjustable-rate mortgage handbook

The Board of Governors of the Federal Reserve System and the Office of Thrift Supervision have released a revised version of the Consumer Handbook on Adjustable-Rate Mortgages. The handbook, known as the CHARM booklet, describes the features and risks of nontraditional mortgage products. It was originally published in 1987 and has been updated periodically to reflect changes in the home mortgage market.

The recent updates recognize the growing popularity of "interest-only" and "payment-option" adjustable-rate mortgage products, which allow borrowers to defer payments of principal and sometimes interest. The revised booklet explains the features of these loans and shows how they could affect a borrower's monthly payment.

Regulation Z, which implements the Truth in Lending Act, requires creditors to provide a copy of the CHARM booklet or a suitable substitute to any customer who applies for an adjustable-rate mortgage. Creditors may continue to distribute their existing stock of CHARM booklets until October 1, 2007. From that date on, they must distribute the new version.

To view the revised CHARM booklet, visit www.federalreserve.gov/pubs/arms/arms_english.htm. For information on ordering hard copies, visit www.federalreserve.gov/pubs/order.htm. The booklet is currently available in English only; a Spanish version is forthcoming.

Fed unveils Web site for bank directors

The Board of Governors of the Federal Reserve System (Board) has announced the release of a new Web site designed to assist bank directors with their management oversight responsibilities. The "Resources for Bank Directors" site at www.kansascityfed.org/bankdirect features financial data for banks and bank holding companies; training materials; and links to bank examination manuals, regulatory letters and other publications.

In addition, the Board recently announced updates to Insights for Bank Directors, an online training course covering the fundamentals of corporate governance, financial analysis, director duties and more. To access the course, visit www.stlouisfed.org/col/director/agenda.htm.