Study Examines Alternatives for Underserved Consumers to Receive Better Access to Mainstream Credit System

WASHINGTON – As many as 35 million Americans could potentially qualify for credit from mainstream lenders by using alternative financial data in consumer reports, according to a new study released today at a symposium on consumer credit hosted by the Information Policy Institute and Experian®, a global information solutions company.

“This study finds that data from utility companies, especially telecommunications firms and energy companies, possess ‘credit-like’ attributes, and are potentially very useful in helping bring underserved Americans into the mainstream credit system,” said Dr. Michael Turner, President of the Information Policy Institute and lead author of the report. “Our findings indicate that because utility payments are required in almost every consumer’s life and almost all consumers are responsible with managing these payments, there should be more merit given to this data by the mainstream lenders.”

The study examined how alternative data can extend credit to underserved consumers as well as the economic, technological and regulatory hurdles to doing so. Traditionally, U.S. consumers have benefited immensely from developments to the national credit reporting system, which allows for consumers to launch businesses, refinance home mortgages and utilize credit cards. Over time, consumer credit reporting has become the principal means of risk assessment for access to the credit market.

At the same time, however, consumers who have little or no information on their credit file, often described as having a “thin-file,” have a difficult time accessing the credit market. Experian estimates that nearly 18 million Americans have files too thin to score and that another 17 million have no files at all. Other surveys find that this market is concentrated among minorities (notably African Americans and Latinos), the poor and other low income segments, the elderly, recent widows and new immigrants. Of the approximately 10 percent of households in the United States that do not have a bank account, over half of those are African American and Latino.

Ironically, the study found that the majority of those with unscorable thin-files or without files at all do in fact engage in activities that can be thought of as “credit-like” such as payment of rent, utilities (such as electricity, gas, telecommunications, and cable), and auto insurance. While these activities are not traditional credit agreements, the regularity of these payments may be an indicator of how risky the prospect of lending to the consumer might be. While serious negative information from these transactions is already often reported through collection agencies, positive information such as on-time payment is not.

“We have many initiatives underway that serve as first steps in extending the current credit reporting infrastructure to accomplish two things: Give lenders greater insight into the underserved segment and reward many consumers by potentially enabling access to credit previously unavailable to them,” said Laura DeSoto, senior vice president of Marketing, Experian Credit Information Solutions. “This research by the Information Policy Institute has helped determine that telecommunication and utility company data has the most promise for benefit to consumers, and draws attention to the crucial importance of industry, public and regulatory support for data reporting by these companies.”

The study found that all parties — borrowers, creditors and data furnishers alike — stand to gain from a system that would accept non-traditional types of data:

• Borrowers — estimated at between 35 to 50 million Americans, could potentially be allocated credit under this new system. It would allow issuers to better optimize risk assessments, distribute costs equally among borrowers, and reduce costs to responsible borrowers.
• Creditors — may have the ability to more accurately assess lending risk, thereby reducing the issuance of bad loans, increase abilities to price loans to match risk, and raise performance rates for the entire loan portfolio.
• Data furnishers — may experience a reduction in delinquent payments and charge-offs.

In summary, the study found that while instituting a framework that accepts these types of transactions would face a number of economic, regulatory, and technological hurdles, the benefits would far outweigh those concerns. The Information Policy Institute is also currently undertaking a project to assess the predictive power of various types of non-traditional data and its impact on consumer access to credit. This research is expected to be completed by the end of 2005.