Alternative credit data gains acceptance

Alternative credit data gains acceptance

Auto lenders who study alternative data can identify consumers who are eligible for loans even if they don't have a traditional credit history to prove it.

Looking at alternative data gives auto lenders a fuller picture of their applicants that can broaden their portfolios and put more consumers into vehicles. The concept has gone from a debated topic to one that has gained wide acceptance, said Brian Landau, automotive business leader at TransUnion. He said it was starting to pick up some momentum after the Great Recession, and that momentum seemed to reach its peak in the last two years.

Alternative credit data in lending typically refers to gathering borrower information outside of a conventional credit score. It looks at consumer payments on items such as cell phones, utility bills, rent and payday loans.

"There's no risk manager I've ever spoken to that says, 'I want to make more decisions with less info,' " said Paul DeSaulniers, senior director of alternative data, scoring and collections at Experian.

The Great Recession in 2008 and 2009 and its strangling of credit gave rise to increased interest in looking beyond conventional credit scores in weighing borrowers' creditworthiness. DeSaulniers said back then, "subprime was a bad word and near-prime a bad word," but there was still a huge market of borrowers and an accompanying, significant need for credit.

"That market has grown and is only going to continue to grow bigger," he said.

Meanwhile, more robust, digital data on consumers has become increasingly available. When lenders invest in such data, technology and analytics, "their returns generally hold up," Lou Loquasto, auto finance leader at Equifax, said in January at the American Financial Services Association's vehicle finance conference. "We see others that continue to do things the way they've done for 30 to 40 years, and they're starting to get penalized."

In 2017, the Consumer Financial Protection Bureau put out a Request for Information to gather feedback on alternative data in lending. It noted that 45 million Americans had either no credit history or a credit history too thin to generate a credit score. It's a problem that disproportionately affects minority and low-income borrowers, the agency said.

The CFPB saw pros and cons with alternative data. On the plus side, it could help improve assessments of creditworthiness. A lender may not give a loan to someone with a credit score of less than 620, for example, but may reconsider if they look at other sources of data. It could also lower credit costs for lenders and consumers. On the other hand, some types of alternative data could contain inaccuracies that are difficult to correct. There is also a risk of discrimination if some of the alternative data points involve factors such as race, ethnicity or gender, the CFPB said. The bureau could not be reached for comment.

At any rate, alternative credit data has gone mainstream, with everything from large credit bureaus to small FinTech companies embracing it. Experian has made several acquisitions to shore up its offerings, such as its 2010 purchase of RentBureau, which includes data on millions of rent-paying consumers in the U.S. In 2017, the company acquired Clarity Services, which DeSaulniers said added information on 62 million consumers' alternative credit history for items such as rent and payday loans.

TransUnion, too, has made several acquisitions in the space, such as its 2017 purchase of FactorTrust, which tracks consumers' short-term and small-dollar lending data. And in July, Equifax acquired DataX, an alternative data provider.

These credit bureaus now have more information than ever on consumers, well beyond traditional credit scores, and they say it is all compliant with regulations such as the Fair Credit Reporting Act.

Meanwhile, there are companies getting even more granular, including in the automotive space. One is Symantec's ID Analytics, which recently released its Credit Optics Full Spectrum Auto for appraising potential borrowers' creditworthiness.

"We've been aggregating [data] since 2002, populating at 100 million data elements per day," said Craig Stokum, ID Analytics sales director, adding that it's an "ever-growing ecosystem of client requests and insights that continue to power our models."

As its name implies, Credit Optics Full Spectrum Auto is meant to help lenders identify potential borrowers that otherwise may have been overlooked or undervalued by conventional credit scores, but it also can give deeper insight throughout the credit score spectrum, including those with prime or super-prime scores.

Using alternative credit data on everything from rent payments to payday loans, ID Analytics can weigh substantial differences within a credit score band. For example, looking at borrowers with credit scores of 750 or higher, it can identify separations of risk among the potential borrowers. And it can do this across the credit-score spectrum.

How much all this could actually lead to more vehicle sales is an open question. But for those in the auto lending space, it represents another potential tool in the effort to move sheet metal.

Jackie Charniga contributed to this report.