Thin credit file? Nontraditional alternatives to the rescue

Picture this scenario: You've lived in this country for the last 15 years, earned a decent wage, raised a family and always paid your rent, utilities, cellphone bills and other expenses on time, month after month.
By: Kenneth R. Harney: latimes.com
But you made little or no use of the conventional banking and credit systems — avoiding bank loans, credit cards and debts in general.

Now you go to apply for a mortgage to buy your first home and get smacked with this sobering news: Sorry, but there is not enough information in your national credit bureau files to score your credit. We've got to either charge you an interest rate well above prevailing ones — 9% or 10% in a 6 1/2 % market — or simply reject you altogether.

That scenario is precisely what large numbers of Latinos face, according to a survey. The 14,000-member National Assn. for Hispanic Real Estate Professionals — Latino and non-Latino realty agents, builders, mortgage bankers and lenders, attorneys and credit counselors — polled 500 of its members and found:

• Nearly one-third said their clients end up paying "subprime" rates on mortgages because their limited credit histories make them appear high-risk when lenders use traditional FICO scores, the dominant credit evaluation method in the highly automated mortgage underwriting process.

• Nearly 80% said that for every Latino household they help put into a home of their own, they're forced to turn away two prospects solely because they can't pass muster under traditional score-based computer underwriting programs.

The Hispanic Real Estate chairwoman, Frances Martinez Myers, said that if mortgage lenders were to use alternative credit-scoring models that factored in rent, utility and other types of payments that are not reported to the national credit bureaus, an additional $200 billion in new home loans could be extended to Latino purchasers.

Felix DeHerrera, incoming chairman of the association, said that under current underwriting approaches, Latinos often get "penalized for being debt-averse, rather than being rewarded for their consistency in meeting financial commitments, even if it is in cash."

But the credit scoring inadequacy problem extends far beyond Latinos. Fair Isaac Corp., developer of the FICO score, estimates that as many as 50 million Americans are impossible or difficult to score because they have minimal information on file at the three national bureaus.

In effect, the credit deck is stacked against them. They often are forced to pay higher fees and interest rates than they deserve.

But there is good news for many of these consumers: Growing numbers of lenders and mortgage brokers understand the "thin file" issue and have begun offering at least one of several alternatives to traditional credit scores.

At the annual convention of the Hispanic Real Estate Professionals earlier this month, a guide was released listing hundreds of brokers and lenders around the country who use the Anthem system of nontraditional credit reports and scores as supplements to FICOs.

Anthem, developed by First American CREDCO, the credit data subsidiary of Santa Ana-based First American Corp., evaluates whatever information on an applicant may exist in the files of the national bureaus — Equifax, Experian and TransUnion. Then it mixes in information collected by CREDCO from other sources. These include regular child-care payments; phone, electricity and other utility payments; current and former rent payments; plus personal credit data from businesses that do not report to the bureaus — small local retailers that extend credit, payday lenders, rent-to-own companies, etc.

This produces an alternative credit file that can then be scored. First American CREDCO says its scores accurately predict borrowers' risk of future default. Better yet, alternative scoring allows lenders to cut mortgage rates, down payments and fees for people with solid — albeit nontraditional — credit backgrounds.

The goal, said Mark F. Catone, CREDCO's senior vice president, is to help "deserving families to secure prime-grade mortgage loans," despite the fact that they score poorly using traditional FICOs.

The Anthem system is just one of several alternatives now available to help "thin file" applicants. Fair Isaac itself offers an alternative-data counterpart to its traditional FICO score known as the Expansion score. Another company is functioning as a national repository for nontraditional credit data. Annapolis, Md.-based PRBC.com specializes in helping consumers build their own alternative credit databases by supplying verifiable rent, utility and other periodic payment information directly to the firm.

Bottom line here: Just because there's not a lot on file about you in the big three credit bureaus no longer means you can't obtain a home mortgage on favorable terms. You just need to ask about — or demand — scoring alternatives from lenders that give you a fairer shot.