Facing the problem
Homeownership is a primary wealth builder for most Americans. Sadly, there are still strong barriers for marginalized borrowers on the path to homeownership. Over the years, we have seen advancements in removing hurdles, but due to the pandemic, homeownership rates for minorities have started to lag. This lag is due to a widening gap of mortgage approvals.
Mortgage approval research has shown that Black applicants are denied a mortgage at an 84% higher rate than White applicants.¹ Consumers with a higher rate of homeownership tend to recover faster economically and do better financially. Also, communities with a higher rate of home ownership tend to have children who are more likely to build generational wealth. This data displays that there are opportunities for advancement for these marginalized communities.
The two main sources contributing to the mortgage approval gap are “Credit Invisible” and "Thin File" consumers. Around 15% of Black consumers are currently classified as Credit Invisible compared to only 9% of White consumers. Credit Invisible refers to consumers who do not have an established credit history or have a credit score below 668. “Thin File” consumers are consumers who do not have enough data to create a credit score. Currently, 13% of Black consumers have an unscorable record, compared to only 7% of White consumers. Either classification will have customers struggling e to be approved for a mortgage. The mortgage industry, as a whole, is working to create greater inclusion to the mortgage lending process.
Alternative data can help
Even though credit reports have done an excellent job at identifying consumers as financially reliable, the industry must continue to innovate. The Fair Credit Reporting ACT (FCRA) reports that certain information that is not currently included in a traditional credit report has the potential to expand consumer access to credit. By introducing more technology advancements and incorporating data outside the traditional credit file, we can open doors for these marginalized communities.
Even though credit reports usually help identify a consumer as financially reliable, according to the Fair Credit Reporting ACT (FCRA), information that is not included in a traditional credit report also has the potential to help expand consumer access to credit.
Types of alternative data
Below is our list of alternative data types that we believe can have the greatest benefit to consumers categorized as Credit Invisible or "Thin File" consumers.
Types of alternative data that provide additional insight into borrowers include:
● rental payment history
● utility payment information (cell phone & cable data)
Rental payment history
Even though it is considered one of the largest, consistent bills that consumers pay with more than 44 million households currently renting in the U.S, rental payment history is not included in the current consumer credit report or credit score.
If a consumer has a positive rental payment history, it can prove that a borrower can pay a mortgage on time. Suppose this starts to be considered part of the underwriting and mortgage lending decision? In that case, This would be a big step in providing underserved consumers a pathway to owning a home. Rental payment data
could help to expand access to credit for more communities, including those struggling with demonstrating they are financially stable in mainstream credit.
Utility payment & cell phone data
Currently, 97% of Americans own a cell phone, and 92% of Black adults are cell phone users.⁵ By using these additional insights to help determine one's credit history, many lower-income Americans and minorities could benefit.
This type of utility data represents information at a national level from industries that touch virtually all U.S. adult residents. These additional insights into the true financial health of individuals can help lenders approve a prospective home buyer more safely and accurately. Many no-hit, “Thin File”, and minority consumers still display the ability to make timely payments. Incorporating these alternative
data sets into lending can help alleviate lender uncertainty and help reduce barriers to accessing financial services.
As the mortgage industry evolves, ensuring that minority and marginalized communities can participate in building financial equity to fulfill the dreams of homeownership should continue to be a top priority. Leveraging access to alternative data insights can enable the mortgage lending industry to feel more confident about extending mortgage opportunities to even more Americans, and help establish a successful financial future for all.
To conclude, by incorporating these types of alternative data and insights, the mortgage industry can finally be in a position to extend access to credit to more consumers.
Make better credit decisions and expand access to credit with data and analytics only Equifax can deliver. To learn more about solutions that can support you throughout the lending lifecycle, visit Equifax.com/mortgage.
1. Home Mortgage Disclosure Act (HMDA
3. Fair Credit Reporting Act