Using Alternative Data to Better Serve Marginalized Communities

This piece originally appeared in the September 2022 edition of MReport magazine, online now.

Research has consistently shown that communities with a high rate of homeownership realize substantial social benefits and tend to flourish and become more economically resilient, with families more likely to thrive and build generational wealth.

However, for underserved populations—including credit invisibles and minorities—the road to homeownership is often met with struggle.

Minority communities continue to face challenges with securing a mortgage. In fact, according to the Urban Institute, approximately 14% of all mortgage applications in 2020 were denied. Examining those applicants who were denied, Black borrowers had the highest denial rate at 27.1% and Hispanic borrowers were a close second at 21.9%.

The entire mortgage industry, including the GSEs (Fannie Mae and Freddie Mac), mortgage collaboratives, lenders, and mortgage technology providers, are placing an increased emphasis on removing barriers to homeownership for these marginalized groups. In efforts to increase inclusion within the mortgage lending process, the industry is working together to introduce nontraditional data, such as rental payments and telephone and utility data, to the application process, thus empowering underserved populations.

Alternative Data Brings Greater Inclusion
The industry can expand the use of data to capture potentially more accurate indicators of financial strength. Access to alternative data, such as rent payment history, utility payment information, and cable bill data, may provide a more complete financial picture of the borrower’s ability to repay debt. Incorporating data from cell phone bills and payments is surprisingly important as most Americans (97%), according to Pew Research, currently own a cellphone.

Rent payments are often one of the largest and most consistent bills that millions of consumers pay each month and are surprisingly not always factored into lenders’ decisioning. As reported by iPropertyManagement.com, more than 44 million households are currently renting in the United States and including rental payment data could go a long way toward helping marginalized communities and thin-file consumers.

Rental payment, cellular phone, and utility data represents information at a national level from industries that touch virtually all U.S. adult residents.

Including such data may offer a better representation of how thin or no-hit consumers, marginalized and minority communities, as well as young and unbanked consumers, will treat their monthly financial obligations.

Greater insight into the true financial health of individuals will help lenders approve a prospective home buyer safely and more accurately. Many underserved communities still display the ability to pay on time. Incorporating 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 financial equity to fulfill the dream of homeownership must continue to be a top priority. Leveraging access to alternative data insights will help enable the mortgage lending industry to feel more confident about extending mortgage opportunities to even more Americans, improving the economy and establishing a successful financial future for all.