Alternative Data to Develop Credit Scores

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Avice Holland
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1 Alternative Data to Develop Credit Scores The U.S. experience towards bridging the information gap and creating an equitable lending environment Chet Wiermanski 2006 TransUnion LLC All Rights Reserved

2 Criticisms of Credit Bureau Scoring Systems All Financial Obligations are not Evaluated Voluntary reporting of lenders Some portfolios omitted Certain loan aspects unreported Essential service providers omitted shelter, power utilities, services Communication providers omitted Income and Assets are Excluded Employment record and income not considered Checking account performance not evaluated Savings and asset ownership not taken into consideration Fragmented, Mixed and Stale Credit Files are not Reliable Incomplete credit files due to inconsistent/poor borrower identification Sporadic and inconsistent use of credit leads to stale information 2

Employment record and income not considered Checking account performance not evaluated Savings and asset ownership not taken into consideration Fragmented, Mixed

3 Credit Bureau Data/Scoring Terminology Alternative Data Dimensions Basic source of information Essential service providers shelter, power utilities, services Communication providers Foundation for identification and credit risk assessment Capacity Character Credit Scoring Dimensions Reduce no-hits Those without a credit file Additional data generates thicker credit files More complete credit risk assessment Frequent updated information Reduces un-score able consumers Up-to date assessment 3

Capacity Character Credit Scoring Dimensions Reduce no-hits Those without a credit file Additional data generates thicker

4 Advancements in Alternative Reporting Significant Increase of Alternative Data Reporting Since 1980 s TransUnion has gathered and reported alternative data Number of essential service providers reporting has increased from a few to several thousand in 2007 Only a minority of essential service providers report Tens of millions of essential service accounts are reported monthly to TransUnion Less than 3% of the estimated available accounts are reported Approximately 10% of consumers have a alternative account on their TransUnion credit report Compared to less than 3% in % of alternative data reporters now report positive and negative 54% from energy providers 44% from communication providers 2% from other essential service providers 4

monthly to TransUnion Less than 3% of the estimated available accounts are reported Approximately 10% of consumers have a alternative account on their TransUnion credit report Compared to

5 Alternative Data Concerns/Myths The Credit Challenged are Further Penalized Minority and Low Income Borrowers are Unfairly Impacted Alternative Data only Benefits Thin File and Underserved Markets 5

6 TransUnion Observations The Credit Challenged are Further Penalized Percent of Consumers with a Collection Item by Race 70.0% 60.0% 50.0% 40.0% With Utility Trades Random Sample 30.0% 20.0% 10.0% 0.0% ALL ASIAN BLACK HISPANIC OTHER WHITE 6

7 TransUnion Observations The Credit Challenged are Further Penalized Percent of Consumers with a Derogatory Public Record by Income 3.0% 2.5% 2.0% 1.5% With Utility Trades Random Sample 1.0% 0.5% 0.0% ALL <$20000 $ $ $ $

Income 3.0% 2.5% 2.0% 1.5% With Utility Trades Random Sample 1.

8 TransUnion Observations The Credit Challenged are Further Penalized Average Number of Satisfactory Accounts Consumers with a Collection Item by Race With Utility Trades Random Sample ALL ASIAN BLACK HISPANIC OTHER WHITE 8

Consumers with a Collection Item by Race 6 5 4 3 With

9 TransUnion Observations The Credit Challenged are Further Penalized $25,000 Average Balances by Income Consumers with a Collection Item by Income $20,000 $15,000 $10,000 With Utility Trades Random Sample $5,000 $- ALL <$20000 $ $ $ $

by Income $20,000 $15,000 $10,000 With Utility Trades Random Sample

10 TransUnion Observations Alternative Data Provides Credit Challenged a Second Chance Credit bureau based scoring systems perform better with alternative data Model results on challenged consumers with alternative data are stronger Better rank ordering increased acceptance rates The percentage of scored consumers increases significantly Access to credit is facilitated number of accounts increase credit limits increase Consumers seeking additional credit appear to perform better On average more satisfactory accounts Delinquency rates are lower 10

rates The percentage of scored consumers increases significantly Access to credit is facilitated number of accounts increase credit

Alternative Data and Fair Lending

Alternative Data and Fair Lending White Paper 81% of historically underserved minority customers that are unscorable using traditional credit bureau scores are scorable using alternative data. August 2013 By Jeffrey Feinstein, PhD Table