Benefits of Full File Credit Reporting. Patrick Walker PERC Presentation

Transcription

1 Benefits of Full File Credit Reporting 1 Patrick Walker PERC Presentation

2 Who i? s A non-partisan, non-profit policy research and development institute devoted to increasing financial inclusion using information solutions. 2

3 PERC s Alternative Data Initiative (ADI) PERC advocates the inclusion of alternative data for use in credit granting alternative = regular bill payment data from telecoms, energy utilities, rental payments and other such non-financial services that are valuable inputs for credit decisions

4 PERC s ADI advocates for Fully Reported Data which is both negative data and positive data

5 Utilities, Telecom providers, and other nonfinancial service providers typically only report negative data directly or via collections: very late payments collections charge-offs PERC wants these providers to also report positive data: on-time payment account open age of account status mildly late payments

6 Gas Electricity Mobile Phone Mortgage Credit Cards Traditional Alternative Credit Bureau Data Cable/Satellite Service Internet Income Rent Credit Bureau Data Car Loan Installment Loans Public Records Collection Accounts

7 Excluding Gas Alternative Data Electricity Alternative Credit Bureau Data Mobile Phone Can exclude half the payment picture of Cable/Satellite Service Internet Rent a borrower And exclude many people leaving them Mortgage Credit Cards Traditional Credit Bureau Data Car Loan Installment Loans Public Records Collection Accounts

8 Q: Who benefits from Alternative Data? A: The credit-underserved population In the US the credit-underserved population is estimated to include 54 to 70 million adults, and disproportionately include: Immigrants Students and young adults Elderly Americans Consumers operating on a cash basis Minorities Consumers trying to establish a good credit rating without new debt 8

9 9

10 Specifically, 2006 PERC/Brookings Study Finds Credit is More Inclusive with Use of Full-file Utility and Telecom Data Increase in Acceptance Rates for a 3% portfolio default rate 10 Minorities and lower income consumers benefit the most

11 A New Pathway to Financial Inclusion (2012) updates the 2006 Alternative Data impacts analysis new report uses data on over 4 million consumers from TU and Experian re-examines issue in wake of Great Recession examines credit score changes, credit tier changes, and acceptance rates when alternative data are fully reported Alternative Data in these files are utility and telecom payment data looks at those with thin-files, and consumers by income, age, and race/ethnicity 11

12 A New Pathway to Financial Inclusion Results 12

13 Change in Acceptance by Household Income (at 3% portfolio target default rate) 30% 25% 20% 15% 10% 5% 0% < $20K $20-$29K $30-$49 $50-$99 $100K+ 2009/ /2006 Low-income group outperforms Driven by: (1) better risk assessment with alt data added and (2) bringing in unscoreable population 13

14 VantageScore Tier Change with Alt Data Uses the ABC Tiers: is an A is a D is a B is an F is a C Unscoreable defined 14 as lowest tier More tier rises than falls Low-income, thin-file see biggest lift

15 Alternative Data can be Reported in Consumer Friendly Ways For instance: Not reporting small unpaid balances on accounts that are closed Not indicating that a customer is subsidized, on a payment plan or in forbearance Only reporting payments over 60 days overdue (or later) as late 15

16 What s the Case for Alt Data Furnishers? Alternative Data Initiative Will the Data be Reported? Is there a business case? Released March 2009 Freely Available: 16

17 Firms: Impact of Reporting US Utility and Telecom survey Average firm benefits of fully reporting are several times the costs Benefits include fewer delinquencies, decline in accounts in arrears, and improved cash-flow Costs include IT upgrades, conducting new processes, compliance procedures and new customer service demands 10% of firms in survey currently fully report to a bureau 89% currently refer delinquencies to a collections agency 17

18 Firms: Impact of Reporting Utility and Telecom survey: Benefits/Costs of reporting to a Credit Bureau All firms reported benefits > costs, including compliance costs 18

19 Customers: Response to Reporting US Customer survey About half of customers more likely to pay on time if payment reported was reported to a credit bureau and impact their credit files and credit scores Over a third would be much more likely 19

20 Specific Cases from Experian 20 20

21 Experian Case Study: Becoming the creditor of choice Location Northeast Industry Type Utility Total Residential Customers 2M+ Experian provided a prereporting analysis for this utility to support the decision to report full file Key findings: Slow paying customers may not be paying other lenders late 39% had 0-1 derogs on file 17% had 2-3 derogs on file Unscoreable customers can benefit 17% of previously unscoreable consumers would receive a score Almost 10% had no trades on file previously Another 7% had a thin file (less than three trades)

22 Experian Case Study: Impact from reporting 60 DPD rates by quarter (began reporting in 2006) Location Midwest Industry Type Utility Total Residential Customers 2M+

23 201 W Main St. Suite 202D Durham, NC (919) x803