Credit scores for overlooked borrowers

Friday, August 20, 2004
By Samantha Peterson
Inman News

John pays his rent and utility bills on time, has no credit cards, no car loan and no other debt. That's certainly good news. But he also has no credit history, so no one will lend him money.

Michael Nathans believes that's a problem, and knows there are millions of actual American consumers just like John.

About three and a half years ago, Nathans acted on the desire to help those consumers and began putting together what is now Pay Rent, Build Credit. The company launched last December and bills itself as a credit bureau for American consumers who don't have enough credit information to have the standard FICO score.

"We've got a chance to help a lot of people here if we do it right," Nathans said.

An estimated 50 million American consumers don't have enough of a credit history to warrant a credit score. But it won't be only consumers PRBC is helping; banks and other lenders are interested in a credit score based on rent and other bill payments. With refinancings drying up, more mortgage lenders are looking to traditionally underserved markets as a way to continue expanding their businesses. But it also can be risky – without a typical credit history, lenders can find it difficult to judge a borrower's credit risk.

Pay Rent, Build Credit takes removes uncertainty by generating a "bill payment score" based on a payment history of rent, utilities and other recurring bills supplied by the consumer and verified by a third party. Nathans hopes the service will eventually help consumers obtain mortgages they otherwise may not have qualified for.

Fair Isaac Corp., which provides predictive modeling, decision analysis and consulting services, has jumped into the no-credit problem as well. The company, whose FICO score is the leading measure of credit worthiness, launched its FICO Expansion Score at the end of July. That score can include payment performance data on financial activities such as deposit accounts, pay-day loans and product-purchase payment plans. Fair Isaac gets the information from niche credit bureaus and then uses it to come up with a FICO Expansion Score.

The score doesn't directly include rent payments, though lenders that request such information from potential borrowers can give it to Fair Isaac to work into the score, said spokesman Craig Watts. He said the company had found it difficult in the past to get reliable, consistent information to use for generating scores, but that Fair Isaac had been interested for awhile in assessing credit risk for those consumers, who are a fairly diverse group.

"It's something of a stereotype that those who don't have FICO scores must all be low income and a member of a minority group," Watts said.

In fact, he said, those who don't have a score come from all ethnic and income backgrounds. Some are young adults who haven't yet established a credit history. Others are senior citizens. Some are wealthy who have never needed credit and so don't have a score. Others are immigrants with high-paying jobs, but because their credit history from their home country doesn't transfer to the United States, they have no scores. Others are divorcees and widows.

Without any advertising, Pay Rent, Build Credit has attracted attention from consumers in 45 different states, Nathans said. Many have entered their bill payment information and written to the company to say the concept is long overdue. The company hasn't yet helped anyone obtain a mortgage, but Nathans said that's the ultimate goal.

Eventually Nathans hopes to accomplish that by having consumers enroll in a bank's bill payment service and having that service linked to PRBC. Consumers would then build credit whenever they paid their bills and without having to manually enter all their information. He said it also could provide a chance for banks to attract new customers by helping them build credit simply by paying their bills.

The service is free to consumers. The company makes money instead by selling their credit reports to lenders, who could benefit from the service by being able to extend credit to consumers they otherwise might have had to turn away. Real estate agents, along with anyone else in the real estate field, might benefit as well if the service is able to help previously dismissed consumers become qualified home buyers.

One realty firm has already recognized that potential. PRBC and Prudential Action Real Estate have put together a marketing brochure that Prudential Action plans to distribute both in English and Spanish to potential home buyers in the New York City neighborhoods it serves. The brochure explains PRBC's approach and how consumers can use their history of paying rent and other bills to buy a house. PRBC also counts Fannie Mae and CitiMortgage among its paying customers.

Fair Isaac's new score also has been well received by lenders since most are looking for tools that help them better assess credit risk, Watts said. The hope is that lenders will eventually think to look for an expansion score if a traditional FICO score doesn't exist for a particular borrower, he said.

If consumers find they don't have a standard FICO score, they can check to see if an expansion one is available by calling Fair Isaac. Soon, the expansion scores will be available to consumers online as well, Watts said.

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