Last week, the Federal Housing Finance Agency (FHFA) announced that Fannie Mae will begin considering borrowers’ rental payment history in its risk assessment process. This is a significant step forward in the use of alternative data in underwriting, and the FHFA and Fannie Mae are to be commended. Allowing consumers to demonstrate their regular rent payments will provide a proven indicator of positive financial behavior and will be a useful complement to the FICO® Score in mortgage lending.
There are 53 million consumers who don’t have sufficient data in the traditional credit bureau files to generate a credit score today. But a great number of these consumers have payment histories – cell phone, utility and rent payments, etc. – that show a personal financial history that isn’t captured by the credit bureaus. That’s why at FICO we are constantly innovating with alternative data sources that go beyond the traditional credit bureau file to increase financial inclusion and bring more of these consumers into the system.
Rental payment data has always been largely absent from consumers’ credit files. While the FICO® Score will reflect rental data when available in the credit files, only 2.3 percent of the estimated 80 million U.S. adults who live in rental housing have a rental trade line reported in their credit file. In fact we found in a 2017 study that only 390 individuals in the entire country likely could benefit from the rental data in their credit files when applying for a mortgage.
Seeking rental data outside of the credit bureaus is also challenging because widespread data sources simply do not exist due to the lack of reporting requirements for landlords. Telecommunications and utility data, which similarly only appear in 5 percent and 2.5 percent of consumers’ credit files, respectively, are available outside of the bureaus if you know where to look. FICO has incorporated FCRA-compliant telco and utility data from outside of the credit bureaus into FICO® Scores that expand access to credit for millions of these consumers.
FHFA’s announcement is particularly promising because it allows consumers to grant permission to access their positive rental data on their own terms. A consumer applying for a mortgage must already provide lenders with information about their assets, obligations and if applicable, rental history, so providing rental payment data at this moment reduces friction for the consumer. Furthermore, today many lenders use APIs and data aggregators that already use permissioned data. Fannie Mae’s acceptance of rental data lays the groundwork for future innovation to streamline the rental payment reporting process even further.
We applaud FHFA and Fannie Mae for this exciting announcement. We share the assessment that the key to expanding access to credit is seeking alternative data. Rental payment data will provide a meaningful complement to the FICO® Score, which is an independent, reliable and predictive analytic tool relied upon by both lenders and investors.
More data drives better outcomes, and this will expand the opportunity of homeownership to more Americans.
