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Researchers Break Down Advantages and Challenges of Alternative Credit Scores

mouse-and-moneyIn a blog post titled “Six things that might surprise you about alternative credit scores,” Karan Kaul, a research assistant with the Urban Institute, breaks down a recent panel discussion hosted by the Housing Finance Policy Center. The panel discussed the benefits and challenges of alternative credit scoring and consisted of three experts on the matter—Sarah Davies, SVP of analytics and research at VantageScore Solutions, Michael Turner, CEO of PERC, and Kenneth Bevoort, Chief of Credit Information and Policy Section at the Consumer Financial Protection Bureau (CFPB).

As the MReport reported last week, credit is still tight for most borrowers, according to an April Urban Institute report.  The report studied loan trends between 2009 and 2013, and found that mortgage credit is tighter than it was at the peak of the housing bubble in 2005 and 2006, as well as pre-housing crisis in 2011. The report concluded that, “Today’s lenders are simply not originating loans for borrowers with less than perfect credit.”

Among the panel takeaways, Kaul highlights’ Davies assertion that “up to 47 million U.S. consumers have thin credit files.” By reaching these homeowners who don’t meet tradition credit-score standards with alternative segmentation and scoring techniques, as many as 40 million previously unscoreable borrowers can now be scored.

Kaul is quick to point out though that in addition to narrowing in on the benefits of alterative credit scores, the panel also pointed out impediments to its widespread adoption. Since alternative data relies on sample data, Brevoort of the CFPB advised caution when using it draw population conclusions, at least  “until the predictive power of these data are reliably demonstrated.”

HUD Secretary Julian Castro said the FHA is exploring alternative credit options to help mortgage borrowers. "FHA's work alone will not solve all the industry's challenges, which is why I appreciate this focus today on out-of-the-box thinking," he said. "I know that new credit scoring models are being developed so that non-traditional factors can be considered when determining creditworthiness."

To see the full panel takeaways and blog post, click here.

About Author: Rachel Williams

Rachel Williams is a Texas-based writer and editor with extensive experience in news reporting, feature writing, and marketing. Her areas of focus include mortgage, default servicing, REO, real estate, and home design and remodeling. She currently serves as editor of the MReport and is past Executive Editor of DS News. She specializes in putting a human face on the stories changing the mortgage industry. She is an alumna of Texas Christian University.

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