Academic journal article ABA Banking Journal

How to Reach the Growing 'Thin File' Market: Huge Immigrant Market and Other Groups with Little or No Credit History May Be Creditworthy. There Are Several Ways to Tap This Well of Business

Academic journal article ABA Banking Journal

How to Reach the Growing 'Thin File' Market: Huge Immigrant Market and Other Groups with Little or No Credit History May Be Creditworthy. There Are Several Ways to Tap This Well of Business

Article excerpt

Thomas Jefferson might have a little difficulty getting a home equity loan today, at least if he followed his own advice. He once said, "Never spend your money before you have it." While that philosophy has much to recommend it, in the consumer credit-driven U.S. economy, following such a course would make it difficult to extend credit. And in fact many potentially creditworthy bank customers have paid for things only with cash--by choice or by circircumstance. Add to this the surging immigrant population--especially Hispanics--who arrive either lacking credit histories, or being culturally predisposed to paying by cash or check. By 2050, it is predicted that more than one quarter of the population will be made up of largely immigrated Hispanics.

To sustain growth and profitability, financial services institutions can't ignore this large and growing credit base. The problem is, the primary way for a financial institution to evaluate a potential customer is to use a consumer report from one or more of the credit reporting agencies: Equifax, Experian or TransUnion. But the credit bureaus presently have no method to incorporate ontime, non-credit payments into the scoring process. This results in what is known as a "thin file" or "no-hit" consumer. An agile lender must be prepared to consult alternative sources of information. While these sources may not be available or relevant in every case, an institution can consider such things as:

* Utility activity;

* Telephone history;

* Rental history; and

* Rent-to-own activity

For example, Con Edison, the primary energy supplier in New York City, has payment histories for more than four million electric and gas consumer and business customers. The information is stored for no less than seven years. Likewise, Qwest and SBC Communications, with a combined customer base of nearly 50 million telephone numbers, retain payment records for an average of seven years.

Four sources of data

Rather than build systems and data interfaces for each alternative source, a financial institution may find that utilizing a third party vendor can make data gathering and analysis easier and potentially more profitable. Shown in the chart on page 48 is an outline of the offerings of four providers: Pay Rent, Build Credit; Fair Isaac; LexisNexis; and eFunds. We'll look at each of these.

1. Pay Rent, Build Credit. Based in Annapolis, Maryland, Pay Rent, Build Credit, Inc. (PRBC) is a credit bureau that has been designated by the Federal Reserve Board and the New York State Banking Department as a "community development service," under the Community Reinvestment Act. This means that banks that assist their low and moderate income customers to build a credit history with rental payments data by reporting to PRBC receive favorable consideration from banking regulators. PRBC operates a program that allows users to build a credit history by having their rental and other bill payment activity tracked so that they can be scored. This can occur in three different ways:

1. Consumers take their historical bill payment information to a number of verification partners for entry into the PRBC database establishing past payment habits and a PRBC Bill Payment Score (BPS).

2. Users request that landlords and other payees, such as telecoms, utilities and internet service providers report to PRBC as payments are received.

3. PRBC is working to partner with larger banks, credit unions and bill-pay services so that payment data processed is reported to the PRBC database.

After the consumer data is collected, it can be sold as a consumer report for "permissible purposes" under the Fair Credit Reporting Act to a financial services institution directly, or licensed for resale through the credit bureaus. Subsequently this data can be incorporated along with existing information into the consumer credit reports. …

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