Trended Data Gives Lenders an Expanded View of Credit History
Mar 25, 2016
Trended credit data, already used by other industries, provides lenders with a longer view (up to 30 months) of borrowers’ credit accounts and how borrowers manage revolving accounts such as credit cards. That is in contrast to the credit scores currently used in most lending decisions, which “do not distinguish between people who carry balances on credit cards and those who pay them off,” notes a recent article by Reuters.
John Ulzheimer, president of the Ulzheimer Group, calls trended data a “game-changer.”
“For lenders, it tells a much richer story about your relationship with your credit cards than what has traditionally been on your credit report. For consumers, it means how you manage your credit card accounts may determine whether you get a loan and what terms you’ll get,” he tells CreditCards.com.
Equifax, Experian, and TransUnion added trended data to credit reports two to three years ago, says Ulzheimer, “and researchers soon discovered that the differences in payment patterns are very predictive in determining who will default.”
How Consumers Benefit
“With trended data, lenders can see if a borrower is continually making the minimum payments or if he is paying more each month, and consistently doing it, paying down balances and improving their utilization,” explains Ken Fears, director of housing finance & regional economics for the National Association of Realtors®.
This broader look helps lenders differentiate between “transactors,” who tend to pay in full every month, and “revolvers,” who carry balances. A transactor is typically considered to be a better credit risk than a revolver, he says.
That’s backed by TransUnion research that found the percentage of consumers in its Super Prime tier would increase from 12 percent to nearly 21 percent of the U.S. adult population with the use of trended credit data.
But, notes Fears, trended data will not help borrowers who do not “have a credit profile.”
Access to Mortgage Credit
Last fall, Fannie Mae announced that it will require lenders to use trended credit data when underwriting mortgages through Desktop Underwriter® (DU®). That trended data from Equifax and TransUnion will be used by DU to allow “a smarter, more thorough analysis of the borrower’s credit history.”
“The assessment of debt repayment behavior expressed as a credit score is highly predictive of the probability of repaying current and future debts,” Eric Rosenblatt, Fannie Mae’s vice president for credit risk analytics and modeling, writes on the company’s website.
Credit scoring models have been part of DU since it was introduced in 1995, he notes.
Initially, DU relied heavily on the prospective borrower’s FICO credit score as the primary indicator of creditworthiness. In 2000, Fannie Mae replaced the credit score with a proprietary credit risk assessment that is more predictive of performance because it is modeled directly on Fannie Mae loans.
In 2015, Fannie Mae used 3.7 million credit reports with trended data (running from June 2009 through August 2012) to conduct modeling and analytics to support a comprehensive review and redevelopment of DU’s credit risk assessment.
“We found that including trended data materially improved modeling of loan performance,” says Rosenblatt. “Including the trended data in DU’s credit risk assessment improves the accuracy of DU’s overall risk assessment and will benefit borrowers who regularly pay off revolving debt.”
DU Version 10.0 will be available in June, says the company.
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