LOANS FOR THE UNSCORABLE

What do you do if you have a non-traditional credit record and want to be property? Many young adults, minorities, immigrants or members of ethnic groups avoid use of the traditional banking system, but when all is said and done, a lender would be happy to loan to them. Problem is, these buyers are what lenders call "unscoreables," or they have such thin credit files that their scores are abysmally low.

Rep. Michael N. Castle of Delaware estimated that "35 million to 50 million people" in this country "may not have a full credit reporting history."

In the banking business no credit is not good. A low credit individual will end up paying high interest rates and fees to get a loan and buying a house.

Recently, a House financial services subcommittee conducted a formal hearing on ways to identify and use alternative data — information not collected by credit bureaus — that might help gauge underserved consumers' creditworthiness. They also talked about how the actual credit risks posed by thin-file and no-file loan applicants.

They are answering questions that every major institution in the home finance industry wants to know. What are the accepted techniques to "see through" applicants' special circumstances.

Data that the credit bureaus often do not collect includes utility payments for electricity, gas, water, telephones and cable TV.

“Utility payments as a prime form of credit data for people outside the regular credit system,” observes Michael A. Turner, president and senior scholar at the Information Policy Institute, a nonprofit research group active on credit issues.
Problem there is that state utilities regulations are covert about dissemination of consumers' payment records. Accessing this information may require regulatory changes at the state level.

Anthem is a system that analyzes existing thin credit bureau data along with current and previous rental payment histories, utility payments, insurance premium payments and child support payments, to name a few. Mark F. Catone, senior vice president of the First American Corp., the data firm that developed the Anthem score, told state regulators that making utility payment data available to credit bureaus "would result in lowering the number of no-files and thin-files" and qualify many loan applicants for lower-cost credit.

Fair Isaac Corp., a.k.a. FICO - the predominant credit scoring technology firm – has developed the Expansion Score, which evaluates nontraditional credit histories by auditing payday loans, rent-to-buy, rental history and other financial accounts, provides lenders predictive scores on eight out of every 10 no-file or thin-file applicants.
 
PRBC Corp. of Annapolis, Md., (Pay Rent, Build Credit) is attempting to become a national credit bureau for people who have minimal or no traditional credit histories using a "Bill Payment Scorecard," which rates consumers' performances on payments of child support, student loans, utilities, phone bills and other accounts.

Countrywide Home Loans, a high-volume national mortgage lender, has developed their "Optimum" mortgage program - a special circumstances mortgage that translates the key elements of nontraditional financial profiles into traditional terms for mortgage underwriting purposes. It is an attempt to offer flexible standards in place of traditionally rigid loan requirements, and to offer nontraditional applicants the same interest rates and terms that prime market borrowers receive.

Ways that lenders are looking to qualify thin file mortgage applicants include:

•  Lenders will attempt substantiate applicants' rent, utility, cable TV, telephone and other regular payment records. Companies like LandSafe Credit are said to be able to investigate most nontraditional credit histories and produce a credit score proxy for electronic mortgage underwriting within 48 to 72 hours at a cost of $30 to $55.

• Many households, particularly immigrants, depend upon pooled family resources or cultural community funds to assemble down-payment cash. This calculation is beyond the grasp of traditional loan underwriting standards, which require applicants to demonstrate that their down-payment cash comes from their personal assets.

• Use of "tenant" income to qualify for monthly payments. Many would-be buyers don't make enough to qualify for a mortgage, yet they may have a boarder or tenant who contributes to the monthly household income. Traditional underwriting rules don't take supplementary income into account for qualifying purposes. The new program will count “boarder” income provided the boarder has been contributing income to the household for at least 12 months.

• Cash businesses. Cash income from sideline work such as child care, cleaning services, landscaping, auto or home repair can be hard to verify. Loan underwriting rules usually don't count this as income.

• Allowing for non-occupant "co-borrowers" such as an uncle or grandparent
 to add some of their incomes to the primary home buyers' monthly income to qualify for the mortgage. Co-borrowers are described as "people with long-standing relationships" with the applicants.

The new special circumstances loan programs intend to  allow minimal down payments and will offer the full range of standard fixed-rate and adjustable-rate loan terms. The borrower will need to have a valid Social Security number and be either a U.S. citizen or permanent or nonpermanent resident alien. Some versions of the program may require home-buyer counseling. For more information, consult a mortgage broker.