Alternative Credit Scoring Helps Widen Pool of Eligible Borrowers

There are many individuals that are currently invisible to lenders who would make great customers. Two credit-scoring companies have come up with ways to enable lenders to consider these consumers, who number in the millions, as potential customers for loans.

FactorTrust of Roswell, GA, says it has credit information on more than 10 million nonprime customers that the Big Three credit bureaus – Transunion, Experian and Equifax – don’t. It also provides its own proprietary auto finance risk scores.

Meanwhile, VantageScore Solutions in Stamford, Conn. utilizes Big Three data, and recently came out with a new scoring model that enables it to provide credit scores on 30 to 35 million consumers who were previously not scoreable by “conventional models.” About a third of them score 600 or higher, the company says, meaning “near prime” or above. Neo, a Silicon Valley startup, also provides alternative credit scoring.

The flood of consumer data available from billers that do not report to the Big Three is contributing to the rapid disruption of traditional scoring and lending models. Alternative scorers have built models that report more quickly and frequently than traditional scorers, and have access to consumers that would otherwise be difficult to reach. These are the so-called ‘underbanked,’ a pool of consumers that use nontraditional financial services out of need or preference.

FactorTrust: Strength in Subprime 
FactorTrust says its “alternative” data can help lenders lower first payment defaults by up to 50%, improve underwriting costs per loan, reduce fraud and add new borrower intelligence for regulatory compliance. Moreover, it can deliver updated information on these borrowers in real time, often within a second or two, rather than having to wait a month or even a quarter to find out.

Greg Rable, the company’s chief executive officer, says his eight-year-old company differs from the Big Three credit bureaus on several counts. First, he says, a lot of nonprime lenders don’t report to the Big Three. “The data I have is really proprietary to us,” Rable says. “The Big Three just don’t have the trade lines from the lenders I work with.”

FactorTrust works with lenders offering auto loans, personal loans, installment loans, nonprime credit cards and rent-to-own contracts. “If a lender is looking at how to underwrite a nonprime customer, the Big Three credit bureau data is just not predictive for them,” he adds. “In many cases auto lenders pull traditional credit data but they find there’s just not enough information on a given consumer.”

The second differentiator is the speed of reporting. “In the prime space, historically, prime lenders usually report to a credit bureau on a monthly or a quarterly basis. For certain types of products, that’s okay,” Rable says. “But in the nonprime space, lenders report to us either in real time or daily. It is vitally important to have that data reported more frequently. Our data helps [lenders] make sure they see everything that these consumers can access. That’s a big difference between the Big Three and us.”

FactorTrust currently has 137 million transactions records on 10 to 12 million unique consumers. It’s growing by about 150,000 to 250,000 new consumers a month, Rable says. Approximately 80% of the consumers in its database have a FICO score of 640 or below. The company has coverage in all 50 states and also does business in the U.K. and Canada.

“The value proposition we present to lenders is speed and efficiency and reducing fraud,” Rable says. “From a compliance perspective, it’s also good for the consumer. Until recently, if you were a nonprime consumer, it was really hard for you to earn your way to be a prime consumer, because if you borrowed money from certain lenders and they didn’t report to a bureau, you never got credit for it.”

For account management, lenders can use FactorTrust data to be alerted when new loans are taken out by the borrower, as well as when employment situations or addresses change. Additionally, new banking relationships or other indicators that can signify a change in customers’ status can also be sent to lenders.  Risk managers may then be more proactive in minimizing risk, such as prioritizing the borrower for collections or reaching out with a friendly reminder that payment is due.

Positive information could alert risk managers to consider upselling and cross-selling of services. For example, Rable says there is growing interest among auto lenders in using FactorTrust’s data to pre-screen prospective borrowers for preapproved credit offers. Using pre-screens can lower the lender’s cost to acquire consumers and do it in a much more targeted way, he says.

VantageScore: Unconventional Analytics
VantageScore says its latest model leverages “improved data and analytic techniques” that enable it to score consumers “who were previously unscoreable because they used credit differently than conventional consumers,” the company says.

“These consumers may not be scored by conventional models simply because they do not exhibit standard credit management behaviors, such as using credit with sufficient frequency,” the company says in a recent whitepaper describing the model. These previously left-out borrowers “can now be scored effectively and fairly, satisfying both risk and fair lending criteria.”

The risk levels for consumers using the new scoring model are “aligned with” those of consumers with conventional credit behaviors, it says. “In other words, a new scoring consumer with a score of 600 reflects the same level of risk as a conventional scoring consumer with a score of 600.”

VantageScore says minorities often slip through the cracks of conventional scoring methods because they have insufficient credit behavior, but its new model is more inclusive. About a third of the consumers – or 9.5 million people – that are now scoreable by its new model are Hispanic or African-American, and nearly a third of them – 2.7 million – score above 600.

Both FactorTrust and VantageScore say their models help lenders broaden their underwriting horizons, which is important for being compliant with the latest consumer safety laws and regulations. Financial inclusion is encouraged by both the FDIC and CFPB.