Financial institutions are looking for new ways to evaluate borrowers…
Reviewing an applicant’s credit score is a must for lenders. But with a record number of defaults, banks are looking for new ways to more effectively weed out risky borrowers. An increasing number of financial institutions are turning to court documents, phone bills and other non-traditional ways of measuring the credit worthiness to help bolster their lending decisions and lower default rates. For example, knowing whether customers are bouncing checks or taking payday loans could alert a lender to possible payment issues. The same information is also considered for those who lack a credit score.
The FICO score, computed by Fair Isaac Corp., is the most widely used ranking system for individual credit worthiness. The exact formula for determining the three-digit score of between 300 and 850 is not known; but the higher the number the more likely the consumer will repay. But predictions using only a credit score have proved too optimistic. In fact, companies that use alternative data to rate consumers for credit responsibility are getting positive results, as opposed to lenders who continue to rely solely on credit scores.
Consumer advocates have long complained that credit scores inaccurately measure borrowers’ ability to pay back a loan and therefore make it more expensive or even impossible for people who have a low score, or none at all, to borrow. By the time a credit report reflects a customer’s deteriorating financial condition, they may already be in default.
L2C, Inc., based in Atlanta, is a consumer scoring company that specializes in helping banks, credit card companies, and other consumer lenders reach the “under-banked” consumer market. President Mike Mondelli says their business increased in May and June of 2008 when it became obvious that more lenders were having problems. “We have had very solid growth this year,” says Thomas Brown, vice president of financial services at LexisNexis, who also helps run RiskView, a service that uses such public filings as court records and property deeds to assess credit risk. “Our data is being seen as useful by a wider variety of lenders.”
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