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.
To access the report, visit www.brook.edu/index/reports.htm.
