FICO recently unveiled a pilot program under which a dozen of the country's largest credit card issuers will use data from "alternative" sources to generate credit scores for an estimated 15 million Americans who are either unbanked or under-banked and, up until now, had no credit score.
Under the program, conducted along with LexisNexis Risk Solutions and Equifax, credit-worthy people who otherwise would have no access to traditional credit, may now finally qualify to receive such financial services. FICO said the alternative data it is using to unearth such previously "invisible" credit-worthy individuals include such items as records of timely payments of rent, telecom and utility bills and property records which indicate geographic stability.
With a long tradition of serving the underserved, credit unions would seem to be a natural market for such an alternative credit score, several CU lending experts expressed some concerns about the feasibility of using the score.
Keith Troup, executive vice president and chief operating officer at Y-12 Federal Credit Union, a $750-million institution based in Oak Ridge, Tenn., and a member of the CUNA Lending Council Executive Committee, told Credit Union Journal that the problem for credit unions with respect to alternative credit scores lies with pricing.
"How do we price a loan for a member with no traditional score, or a score model/source we are unfamiliar with," he asked. "Credit unions have typically been successful by lending prudently, opportunities are available to serve more members' loan needs by being open to new approaches to serve member loan needs."
Bob Schroeder, vice president and consultant at Lending Solutions Consulting Inc., a company that provides consumer lending advice to credit unions, similarly wondered how an alternative credit score might influence loan pricing models at credit unions.
"Credit unions are rather conservative, so I'm not sure how quick they will be to embracing these alternative credit data," he said. "I don't see any immediate impact on credit unions once this alternative credit score actually comes into being."
That's not to say that credit unions aren't interested in serving this potentially large market.
According to a recent Bankrate.com survey, almost two-thirds (63%) of millennials do not have a credit card. Given that millennials — people between the ages of 18 and 34 — are a large demographic (more than 75 million according to Pew Research) and are in their prime lending years, it's a market lenders can't afford to ignore.
According to FICO, there are some 53 million "unscorable" people in the U.S. who cannot get a credit card because they have little or no credit history. Of that figure, an estimated 15 million would have sufficient credit history to qualify for an alternative credit score.
The idea of using different data points to create an alternative credit score is hardly new. Patrick Reemts, VP Credit Risk Solutions at ID Analytics, a firm that has been formulating alternative credit information since 2007, noted, for example, that to evaluate the credit score for an "unscorable" individual, his firmuses information that isn't typically found at the Nationwide Credit Reporting Agencies, such as data from cell phone applications, subprime loans, online lending relationships, or even information from checking or savings accounts.
"Consumers often start their financial footprint with these types of relationships, which often don't show up at the largest credit bureaus," Reemts said. "The idea is to find other meaningful relationships that a consumer might have that will help indicate their credit-worthiness so a consumer can secure a loan and a lender can work with a credit-worthy individual."
FICO's latest foray into alternative scoring is currently only intended to help "unscoreable" people obtain credit cards, which would, in turn, allow them to develop more traditional credit scores that would then give them access to other types of loans and lenders requiring the traditional scores.
Jim Esner, underwriting manager at $2 billion Grow Financial Federal Credit Union in Tampa, Fla., as well as member of the CUNA Lending Council, explained that the concept of judging someone's creditworthiness by their payments of utility bills can be traced back to the 1980s with the emergence of the National Consumer Telecom and Utilities Data Exchange (NCTUE).
But there was one very key difference: the NCTUE wasn't created for the purpose of underwriting and extending credit.
"While it wasn't used necessarily to determine if someone was a good risk for a loan, it was used by utility-type companies to determine whether someone was high risk," he said. "If other utility companies had reported [a customer] delinquent or owing money, then other utility companies... could see that information via the NCTUE, and potentially require a deposit prior to providing those services to a person's new apartment or house. Cable and electric companies are a few that are still using this information today in addition to credit reports."
On a philosophical basis, Esner believes that people who have no credit — but who have done nothing wrong in their financial histories — "should be given the opportunity to build their credit scores rather than being declined outright. In doing so, they will eventually qualify for loans of various kinds."
Moreover, it can be a loyalty-building tool to do so, Y-12 FCU's Troup suggested, noting that by giving young people with negligible credit a chance to join a credit union and steadily build up their credit history, they would also inspire loyalty and create another generation of dependable credit union members.
FICO's new alternative score comes at a time when many lenders who had previously tightened their underwriting in the wake of the financial crisis, are now more open to finding ways to work with people with "imperfect credit."
"In today's environment, most banks we work with are actively trying to serve this market as it's generally understood this is where the future consumer base will come from," Reemts told Credit Union Journal.
But it may be a different story with credit unions, he said, where it's not unusual to still see some manual underwriting that isn't as dependent on credit scores. Even so, he's not counting out CUs' interest in alternative scores just yet.
"The motivations and ability to quickly train personnel make credit unions the perfect place to use such products," he added."Alternative scores can really boost any size of a lender's ability to safely reach out and offer more affordable products to the underbanked."