One of the most important steps on the road to owning a home is accessing mortgage credit. Researchers examining the racial divide that exists in home ownership and the wealth that comes with it recently examined alternative data used in obtaining credit, and whether this would promote or hinder fair lending goals.
The National Association of Realtors (NAR) has requested a research paper to assess three major types of alternative data that can be used to evaluate a consumer’s creditworthiness: credit proxies, banking information, and non-financial personal information.
According to NAR, using additional data to determine the creditworthiness of potential buyers will increase homeownership opportunities among black and Hispanic Americans.
The newspaper, Tipping the SCALE: How Alternative Data to Credit Scores Promotes or Impedes Fair Loan Goals, written by industry leaders and PhDs Ann B. Schnare and Vanessa Gail Perry, examines how reforms to current credit bureau data and scoring models that ignore common household expenses, such as rent and utilities, would provide a more comprehensive picture. dramatically increasing a household’s credit performance and real estate ownership opportunities.
“Minorities are much more likely to be out of luck or have relatively weak credit scores using traditional credit bureau data,” said Schnare — a former consultant to the U.S. Department of Housing and Urban Development and chair of her own consulting firm that specializes in housing and mortgage financing. a virtual event hosted by NAR to discuss the findings. “Incorporating additional data into the credit evaluation process could open doors for many deserving borrowers and increase minority homeownership rates.”
Perry added that the rise of “big data” is expanding credit scoring options exponentially. However, she added, “predictability is not enough to justify the use of certain types of data. Its use must also be consistent with broader social and ethical values.”
Their findings, discussed in this video presentation by NAR, outline a solid five-factor framework of considerations that can contribute to fair lending:
- Social values: Does it respect social and ethical standards such as the right to privacy?
- Contextual Integrity: Regardless of its predictive value, is it relevant for mortgages?
- Accuracy: Do the data accurately reflect the household’s financial situation?
- Legality: Would using the data have a disparate impact on protected classes?
- Extended option: Would using the data increase the number of qualified borrowers?
They call the model “SCALE” for short.
It adds to the conversation and calls for action, but, NAR representatives say, “home ownership for black and Latino Americans has lagged behind white Americans for decades, highlighting the need to overhaul existing tools. and identify new credit valuation processes.”
This highlights the ongoing need to review existing tools and identify new credit valuation processes, according to NAR President Charlie Oppler.
“A borrower’s credit report and credit score are the gateway to a mortgage,” he said. “For too long, inaccurate credit reporting methods have increased the cost of borrowing while limiting access to mortgage credit for potential borrowers, particularly those from minorities and rural communities. NAR is eager to apply this new research to our policy positions and advocacy in the future.”