Analysis compiled by Edmunds.com of used-vehicle financing activity during the second quarter at franchised dealerships turned up more evidence of the fuel igniting record-setting growth.
According to the site’s latest Used Vehicle Market Report, the average amount financed moved 3 percent higher year-over-year to $20,732.
“Loan terms are growing to offset higher prices but for the first time since pre-recession we are seeing average APRs creep higher,” Edmunds.com said about the average APR, which came in at 7.7 percent.
“While nearly 60 percent of used buyers financing their vehicle obtained an APR of 5 percent of lower, many buyers have APRs in excess of 10 percent,” the site continued in its reported, which also mentioned the average used-vehicle retail prices hit a record high in Q2.
Edmunds also pointed out that the average term for a used-vehicle installment contract originated at the franchised store during the second quarter climbed to 66.2 months, extending an upward march that began in 2009.
Beyond the rising retail prices, Edmunds.com director of industry analysis Jessica Caldwell told SubPrime Auto Finance News during a phone conversation on Friday that another elements is pushing the APR average higher.
“My feeling is some of the folks in the subprime market are driving up the averages,” Caldwell said. “It is a law of averages because the majority are paying a lower interest rate. But for every person who is getting a 2 percent APR, there is someone paying 25 percent. It definitely affects the averages.”
All of that used-vehicle activity at franchised dealerships — subprime or not — helped to push the industry to a new record in Q2.
According to the New York Federal Reserve’s Consumer Credit Panel, a nationally representative sample drawn from anonymized Equifax credit data, auto loan originations reached a 10-year high in the second quarter at $119 billion, supporting a $38 billion increase in the aggregate auto loan balance.
That balance is now above $1 trillion, which Equifax deputy chief economist Dennis Carlson discussed with SubPrime Auto Finance News in more detail.
More discussion about how the subprime slice of the auto finance market is behaving is on tap for the SubPrime Forum, which is a part of Used Car Week. Analysts and experts from the leading data and compliance providers are set to be a part of the event, which runs from Nov. 16-20 at the Phoenician in Scottsdale, Ariz.
For more details, go to www.usedcarweek.biz.
Officials from eLEND Solutions recently unveiled an upgrade to the company’s CreditPlus solution that’s being dubbed, “Get Prequalified in Seconds.”
The technology provider explained that this enhancement to CreditPlus can give dealers an online instant prequalification lending solution to elevate the online automotive retail financing process from basic prescreening to full prequalification.
Officials insisted the new CreditPlus features can bring a “revolutionary” instant prequalification program to retail automotive for the first time through Credit Bureau Connection, the exclusive credit reseller for eLEND Solutions.
Until now, eLEND Solutions emphasized dealers only had access to prescreening products, which offered limited credit information and were initiated without consumer consent or hard inquiry credit report products that impact consumers’ credit scores and have the burden and costs of additional compliance requirements.
CreditPlus’ “Get Prequalified in Seconds” can deliver a full credit report and exact real-time credit score, and, importantly, is consumer-initiated so it can greatly reduce compliance costs by eliminating the requirement for a firm offer of credit and the risk-based pricing notice.
Now dealerships can prequalify consumers with a soft pull credit report in real time, instantly delivering a variety of finance options, driving up qualified leads and enabling them to match consumers with the right lending options early in the buying process.
“There is a huge difference between prequalification and prescreening or traditional hard inquiry credit reports. We are thrilled to offer CreditPlus users this game changing prequalification product and to have worked with our credit reseller partner Credit Bureau Connection to insure we have delivered a secure and 100 percent compliant process to our dealers,” eLEND Solutions chief executive officer Pete MacInnis said.
“The addition of prequalification to our suite of products enhances our mission of creating a connected car buying experience that seamlessly transitions online car shoppers to in-store buyers,” MacInnis added.
CreditPlus instantly can prequalify customers based on dealer-defined credit criteria, giving buyers direct, upfront access to dealership financing sources and real near-final terms from multiple finance companies, all of which are controlled by the dealer.
With CreditPlus, dealers are able to match a buyer with the right vehicle and the right financing program before the customer has even started the test drive. This process can facilitate a more equal exchange of information between consumer and dealer and the structuring of a more profitable deal.
“With the addition of PreQual to CreditPlus, eLEND Solutions is enabling the auto dealer to take a huge step forward in providing instant, real-time automotive financing options,” Credit Bureau Connection CEO Mike Green said.
Special finance software solution provider ProMax Unlimited reviewed dealership data from July and compiled the top 20 highest grossing vehicles in three different subprime credit tiers.
The three lists should be especially helpful for dealerships and finance companies that originate deliveries associated with models from Chevrolet, Hyundai, Ford and Dodge
In a blog post, ProMax Unlimited noted that vehicles are ranked in order of total units sold, not total gross:
Credit Tier 575-619
1. 2013 Hyundai Elantra: $2,646.98
2. 2013 Chevrolet Cruze: $3,600.26
3. 2013 Kia Soul: $3,218.34
4. 2013 Chevrolet Malibu: $2,981.18
5. 2013 Ford Fusion: $2,920.35
6. 2013 Chrysler 200: $2,524.60
7. 2013 Dodge Avenger: $2,250.00
8. 2013 Dodge Grand Caravan: $2,886.46
9. 2013 Hyundai Sonata: $2,946.06
10. 2014 Chevrolet Cruze: $3,852.71
11. 2011 Chevrolet Malibu: $2,788.54
12. 2013 Kia Optima: $2,784.82
13. 2012 Ford Fusion: $2,135.75
14. 2013 Ford Focus: $4,494.38
15. 2012 Chevrolet Cruze: $3,627.27
16. 2012 Toyota Camry: $3,001.35
17. 2013 Chevrolet Sonic: 2,759.05
18. 2012 Chevrolet Malibu: $3,102.32
19. 2012 Ford Focus: $2,266.01
20. 2013 Chevrolet Impala (Fleet): $2,230.22
Credit Tier 520-574
1. 2013 Ford Fusion: $3,137.13
2. 2013 Dodge Avenger: $1,727.26
3. 2013 Hyundai Elantra: $2,982.77
4. 2012 Ford Focus: $1,739.23
5. 2013 Chevrolet Cruze: $2,267.88
6. 2013 Chevrolet Impala (Fleet): $2,195.01
7. 2013 Hyundai Sonata: $2,206.30
8. 2012 Ford Fusion: $3,013.60
9. 2013 Kia Soul: $2,956.19
10. 2012 Nissan Altima: $2,778.23
11. 2014 Chrysler 200: $2,623.67
12. 2012 Chevrolet Cruze: $2,203.18
13. 2013 Chrysler 200: $1,829.98
14. 2014 Nissan Altima: $2,923.39
15. 2013 Dodge Grand Caravan: $2,250.34
16. 2014 Ford Fusion: $1,861.77
17. 2014 Chevrolet Cruze: $1,653.25
18. 2012 Chevrolet Malibu: $2,483.58
19. 2013 Chevrolet Malibu: $1,718.37
20. 2013 Ford Escape 4WD: $3,463.21
Credit Tier 460-519
1. 2013 Dodge Avenger: $2,766.95
2. 2013 Hyundai Elantra: $1,902.93
3. 2013 Chevrolet Malibu: $745.25
4. 2011 Ford Fusion: $1,357.39
5. 2013 Nissan Altima: $2,544.57
6. 2013 Chrysler 200: $2,208.38
7. 2014 Chevrolet Cruze: $3,519.93
8. 2012 Ford Fusion: $2,231.35
9. 2012 Chevrolet Malibu: $3,351.51
10. 2012 Nissan Altima: $3,582.73
11. 2014 Nissan Altima: $2,601.81
12. 2014 Chrysler 200: $1,934.95
13. 2013 Chevrolet Impala (Fleet): $1,456.55
14. 2013 Kia Optima: $2,612.91
15. 2013 Chevrolet Cruze: $2,473.77
16. 2013 Dodge Dart: $2,716.96
17. 2013 Ford Fusion: $2,652.25
18. 2014 Toyota Corolla: $2,404.98
19. 2013 Ford Focus: $2,715.42
20. 2013 Kia Soul: $2,104.89
CU Direct Connect (CUDC), a participant in the Colorado automotive financing market that provides indirect services to credit unions and dealers, announced the upcoming availability of a custom auto loan risk score designed by FICO.
Officials highlighted this new score — which is expected to be available during the third quarter — is geared to help credit unions that are lending through CUDC’s program manage their risk with greater precision and safely extend their credit to more people.
Designed to complement the proven performance of the FICO Score, CUDC explained that the custom application score analyzes specific data elements from consumers’ credit bureau files, information from the consumer’s credit application and deal information to more precisely distinguish good and bad credit risks for vehicle installment contracts.
The overall goal is to help participating credit unions drive more profitable decisions.
As CUDC expands into Wyoming, Arizona and other markets, this new custom score will allow CUDC credit unions to better manage credit risk on portfolios in new markets.
“The FICO Score has been the gold standard for assessing consumer credit risk in North America for 25 years,” said Tim VanTassel, vice president of credit risk lifecycle solutions at FICO. “Adding our custom application score brings CUDC and its lending partners the sharpest possible prediction of a borrower’s likely performance on an auto loan.”
CUDC president and chief executive officer Blair Korschun reiterated that the company fully supports its credit union partners that are looking to drive better bottom line results by taking a smart, strategic approach to credit-risk evaluation and compliance
“By working with FICO to create a custom application score, we are taking a big step in supporting our credit union partners and their interests,” Korschun said. “By using this new score, the credit unions in the CUDC program can better manage risk associated with auto loans.”
To learn more about the CUDC program and becoming a credit union or dealer partner, go to www.CUDirectConnect.com.
With finance companies evidently thirsty for any reliable data and analysis about millennials that’s available, Experian and the National Automobile Dealers Association both chimed in on the topic of consumers born after 1980.
Earlier this week, NADA chief economist Steven Szakaly offered a cautious assessment of how millennials are going to impact the market, especially since he projected new-vehicle sales could reach an all-time high of 17.46 million units in 2016.
Szakaly explained that in part millennials “could present challenges to long-term growth in auto retailing.” The factor prompted him to note that after the industry potentially posts a record new-vehicle sales mark next year, the retailing of new models might soften back to 16.65 million units in 2017.
The NADA expert offered his assessment of millennials and made these predictions at the Center for Automotive Research's Management Briefing Seminars earlier this week in Traverse City, Mich.
“It will take four Millennials to replace the spending power of one Baby Boomer in the automotive retailing marketplace,” Szakaly said. “There’s also a wage gap between baby boomers and millennials, and stagnating wages for millennials, along with increasing vehicle-transaction prices, will pose challenges in the long run.”
Not long before Szakaly shared his perspective, Experian released key findings from a recent study meant to provide a glimpse into the credit management habits of millennials and show how coming of age in a challenging economy has had an effect on this generation’s credit profile.
Experian’s study showed that millennials appear to favor vehicle loans over leases, as there were 13.4 auto loans per one lease in the bureau’s analysis. Experian indicated this ratio is 9.3 to 1 for Generation X — individuals ages 35 to 49 — and 8.3 to 1 for baby boomers — consumers age 50 and older.
However, Experian also determined vehicle leases tend to be a product that may attract older consumers because they tend to have higher and more established credit. Consequently, Experian said its findings from the analysis showed that the older millennials were, the more likely they were to have a vehicle lease, rather than their younger counterparts.
That segment of Experian’s study slightly differed with a recent analysis generated by Edmunds.com, which reviewed registration data provided by Polk and determined that leasing has accounted for 28.9 percent of all new-vehicle purchases so far this year by millennials who range in age from 18 to 34.
Even with millennials taking a little longer to establish some forms of credit compared with previous generations, Experian insisted their sheer numbers make them an important and growing market segment. When comparing credit usage of a more youthful generation X population, Experian found that there appears to be some interesting trends in origination patterns.
Auto loans make up 14 percent of all recently opened accounts for millennials, compared to 1 percent for their generation X counterparts at the same age in 1998.
“We’re seeing that millennials are purchasing cars at a much earlier point in life, which is giving them the opportunity to build credit a little differently than previous generations,” said Rod Griffin, Experian's director of public education.
“This is a critical time for members of this generation as they are learning to use credit as a tool,” Griffin continued. “With so many financial education resources available to help them, we believe that members of this generation are more empowered and informed than members of other generations and are starting their adult lives off by building strong credit as they set out on their own.”
Similarly, Experian indicated student loans make up 24 percent of all new accounts for millennials, compared to 20 percent for their generation X counterparts at a comparable age.
Experian’s study also shows that fewer millennials are using bankcards, with only 27 percent of their recently opened accounts being bankcards, compared to 46 percent for their generation X counterparts at the same age.
“Given the significance millennials play in financial services and the credit marketplace, it is crucial to understand this influential consumer segment and how they use credit as a tool," said Michele Raneri, vice president of analytics and business development at Experian.
“While this generation may not look like they are on the right track financially, it’s important to keep in mind that credit scores are built on credit experiences, and while this generation has been slower to use credit, they have plenty of opportunities to build a positive credit history,” Raneri went on to say. “The best way to do that is to understand credit before using it.”
Along with taking their usual look at activity during the past three months, Federal Reserve officials also asked participants in the latest Senior Loan Officer Opinion Survey on Bank Lending Practices to examine trends going back 10 years.
Specifically, the Fed wanted a description of the current level of lending standards at banks relative to the range of standards that has prevailed between 2005 and the present. When it comes to subprime auto financing, the participants’ responses showed the banks that underwrite vehicle service contracts in this space indicated that standards on such loans remained tighter than the midpoints of the corresponding ranges since 2005 on net.
While the survey included more than 60 banks participate in prime auto financing, a total of 30 banks that responded to the survey delve into the subprime space.
A total of 11 banks said their subprime underwriting trends have been near the midpoint of the range that standards have been during this period. Seven banks indicated they have been somewhat tighter than the midpoint while six institutions noted they have been somewhat easier.
Another five banks said they have been either significantly tighter or near the tightest level that standards have been during this period as just one acknowledged it has been significantly easier.
Of the 30 banks that participate in subprime auto financing and responded to the Fed’s survey, the split was even between banks classified as large — which are generally defined as firms with annual sales of $50 million or more — and small firms — which are those with annual sales of less than $50 million.
Within the prime spectrum, the Fed found that 40 of the 61 banks told officials that their underwriting has been near the midpoint of the range that standards have been during this period. Another 12 firms said they have been somewhat easier while the remaining nine indicated they have been either somewhat or significantly tighter.
Looking at just the past three months, the Fed survey mentioned 45 out of 62 described demand for vehicle financing as “about the same” during that span.
As a result, the vast majorities of respondents told officials that several other factors have remained virtually unchanged during the past three months, including:
— Credit standards for approving applications
— Maximum maturity
— Spreads of loan rates over the bank’s cost of funds
— Minimum required down payment
— Minimum required credit score
— The extent to which financing is granted to some customers who do not meet credit scoring thresholds
The entire July survey can be downloaded here.
Westlake Financial Services and Equifax now have more data to support their argument that subprime auto financing can benefit individuals with soft credit histories, rather than create a negative situation some regulators and consumer advocates might believe.
Equifax recognized Westlake Financial Services on Tuesday as the national finance company whose customers saw the highest credit score increase over the term of their loan. This development was a follow-up to a white paper Equifax released extolling the significant benefits that subprime customers can receive when they got a second chance by successfully paying their vehicle installment contract.
According to Equifax research data, when comparing a national sample of 125,000 customers with auto loans originated in the 2014 calendar year, Westlake Financial Services customers produced the highest average credit score increase over the term of their loan.
“We focus on a loan structure that works long term for the customer, which helps increase their credit rating as payments are made over time,” said Westlake Financial Services group president Ian Anderson, the recipient of last year’s SubPrime Auto Finance Executive of the Year Award who is expected to a panelist again during this year’s SubPrime Forum during Used Car Week.
“Westlake strives to make our customers’ lives better,” Anderson continued. “By helping our borrowers increase their credit scores, we make it easier for them to qualify for loans and purchases in the future.”
Two of the most recent Equifax white papers highlighted the positive elements of subprime auto financing.
Last summer, Equifax chief economist Amy Crews Cutts and deputy chief economist Dennis Carlson highlighted the position in a white paper titled, "Not Yesterday’s Subprime Auto Loan." They reiterated the importance subprime financing to the future of consumers who have damaged credit profiles. The Equifax economists noted the positive consumer ramifications well known to finance company executives at institutions that specialize in subprime contracts such as the importance of quality transportation to enhance employment opportunities and how steady payment performance can possibly lead to a rise toward prime status.
“If a borrower with subprime credit obtains a loan from a financial institution that reports the complete payment histories of their clients to the national credit reporting agencies, and that borrower makes timely payments on that loan and other credit obligations, then over time that borrower’s credit score will likely improve, possibly enough to qualify for prime credit terms,” Crews Cutts and Carlson said.
Then at the beginning of this year, Equifax again found data that clearly backed up the claim, which the company shared in a report titled, "Subprime Auto Loans: A Second Chance at Economic Opportunity."
Equifax determined that over a three-year time period, those consumers with deep subprime credit scores that originated a subprime auto loan showed, in aggregate, a significant increase in their credit score. In fact, analysts highlighted those consumers improved their credit score by a median of 52 points, which is a 62.5-percent improvement over the median score change of the group that did not take out a loan.
And now the industry has the performance of Westlake customers to refute naysayers’ claims about the possibility of finance companies taking advantage of subprime customers.
“Westlake’s interest in our original article prompted us to examine, at a lender level, where the improvements of subprime customers graduating to near-prime and prime standing was the greatest,” Equifax auto finance leader Lou Loquasto said.
“Westlake and other subprime lenders like them should be lauded for giving the right customers the right loan, and for enabling them to get back on their feet,” Loquasto went on to say.
Discussions and industry highlights are all on tap to be a part of this year’s SubPrime Forum, which is set for Nov. 16-18 at the Phoenician in Scottsdale, Ariz. Registrations are already open and sponsorships are also available. More details can be found at www.usedcarweek.biz.
Ohio attorney general Mike DeWine and 30 other state attorneys general reached a settlement this week with the three main credit reporting agencies — Equifax, Experian and TransUnion — which have agreed to make a number of changes to their business practices.
Enforcement officials recapped that DeWine initiated a multistate investigation in 2012 that focused on consumer disputes about credit report errors, monitoring and disciplining data furnishers (providers of credit reporting information), accuracy in consumer credit reports and the marketing of credit monitoring products to consumers who call the credit reporting agencies to dispute information on their credit report.
Under the settlement, officials said the credit reporting agencies have agreed to increase monitoring of data furnishers, to require additional information from furnishers of certain types of data, to limit direct-to-consumer marketing, to provide greater protections for consumers who dispute information on their credit reports, to limit certain information that can be added to a credit report, to provide additional consumer education, and to comply with state and federal laws, including the Fair Credit Reporting Act.
“Today is a good day for all consumers,” DeWine said. “We are announcing a comprehensive multistate settlement that will help protect consumers from credit reports that are wrong, out of date, or even mixed up with someone else’s report, and it will reduce the chance that a consumer is wrongly denied a house loan, a car loan, or even a job, because of an inaccurate credit report.
“This settlement requires the credit reporting agencies to do a better, more careful job, to produce more accurate credit reports, and to be much more responsive when consumers call to correct their mistakes,” DeWine continued.
In reacting to this week’s settlement, Stuart Pratt, president and chief executive officer of the Consumer Data Industry Association, referenced back to how Equifax, Experian, and TransUnion created the National Consumer Assistance Plan back in March. Pratt emphasized that strategy was geared to enhance their ability to collect accurate consumer information and to provide consumers with a better experience in interacting with the national credit reporting agencies about their credit reports.
“That plan, which arose out of collaborative discussions between the three agencies and a group of state attorneys general and the attorney general of New York, will enhance credit report accuracy, increase transparency, and provide meaningful benefits to consumers,” Pratt said.
“Those benefits, which will be rolled out nationwide, stand as an example of what can be achieved when private industry and government officials work together,” he went on to say.
In agreement to this week’s settlement, Pratt emphasized that Equifax, Experian, and TransUnion “have been in compliance with federal and state law, but as we showed in launching the National Consumer Assistance Plan, we do not hesitate to make improvements beyond what the law requires when doing so will benefit consumers.
“With the exception of the financial payments the credit reporting agencies are making to the attorneys general to cover the costs of their investigations, consumer education and other purposes, the settlement essentially adopts the plan announced with the New York attorney general,” he continued.
Pratt pointed out that what’s been described as “the most recent comprehensive government study” showed that credit reports are “materially accurate” 98 percent of the time.
“But our goal is always to improve beyond even that high standard of accuracy, and we will continue to look for ways to make further enhancements, as we have done several times in recent years,” Pratt said.
More Details of Latest Settlement
Key provisions of the settlement — what officials called an assurance of voluntary compliance — include:
— The credit reporting agencies must maintain information about problem data furnishers and provide a list of those furnishers to the states upon request.
— The credit reporting agencies and data furnishers must use a better, more detailed system to share data.
— The credit reporting agencies cannot market credit monitoring services to a consumer during a dispute phone call until the dispute portion of the call has ended.
— The credit reporting agencies must tell consumers that purchasing a product is not a requirement for disputing information on their credits reports.
— The credit reporting agencies must implement an escalated process for handling complicated disputes, such as those involving identity theft, fraud, or mixed files (in which one consumer’s information is mixed with another’s).
— Each credit reporting agency must notify the other agencies if it finds a mixed file.
— The credit reporting agencies must send a consumer’s supporting documents to the data furnisher. (The credit reporting agencies implemented this change after the attorneys general initiated their investigation and raised the concern that the pertinent complaint documents were not being sent to the furnishers.)
— Consumers may obtain one additional free credit report in a 12-month period if they dispute information on their credit report and a change is made as a result of the dispute.
— The credit reporting agencies are generally prohibited from adding information about fines and tickets to credit reports.
— The credit reporting agencies cannot place medical debt on a credit report until 180 days after the account is reported to the credit reporting agency, which gives consumers time to work out issues with their insurance companies.
— The credit reporting agencies must require debt collectors to provide the original creditor’s name and information about the debt before the debt information can be added to a credit report.
— The credit reporting agencies must tell consumers how they can further dispute the outcome of an investigation into a dispute, such as by filing a complaint with other agencies.
— Each credit reporting agency must provide a link to its online dispute website on the website www.annualcreditreport.com, and the credit reporting agency’s dispute website must be free of ads and any marketing offers.
Officials explained the changes required under the settlement will be implemented in three phases to allow the credit reporting agencies to update their IT systems and procedures with data furnishers. All changes must be completed by three years and 90 days following the settlement’s effective date.
Participants & Ramifications of Settlement
Officials went on to mention a violation of the settlement by any of the credit reporting agencies can be enforced according to state law.
In Ohio, for example, a violation of an assurance of voluntary compliance is prima facie evidence of a violation of the state’s Consumer Sales Practices Act, meaning it would provide sufficient proof for the state to establish a case.
Under the settlements, the credit reporting agencies also will pay the participating states $6 million. As the lead state, Ohio will receive $459,912.80 under the settlement.
Participating in the settlement are the attorneys general from the states of Alabama, Alaska, Arizona, Arkansas, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Missouri, Nebraska, Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, Tennessee, Texas, Vermont and Wisconsin.
In an effort to enhance the capabilities of underwriting departments, FICO recently announced the general availability of industry-specific versions of FICO Score 9 for U.S. auto finance companies and credit card issuers. The industry versions of FICO Score 9 are available from all three major U.S. credit reporting agencies.
“The industry versions of FICO Score 9 are important additions to the FICO Score 9 suite, helping lenders manage risk with greater precision and extend credit safely to as many people as possible,” FICO executive vice president for Scores Jim Wehmann said.
“FICO Auto Score 9 and FICO Bankcard Score 9 evaluate all the information in a credit report to identify a borrower’s specific credit risk as it relates to auto loans and bankcards, respectively,” Wehmann continued.
“The predictive power added to FICO Score 9 through important innovations, such as our nuanced treatment of medical debt, helps credit grantors increase lending responsibly,” he added.
“FICO Score 9 can help lenders address their risk and compliance challenges and continue making responsible loans. And as auto lenders extend credit to a larger range of borrowers, the improved predictiveness of FICO Auto Score 9 will be critical,” Wehmann went on to say.
The company mentioned businesses bought more than 10 billion FICO Scores last year, and the scores are used in 90 percent of consumer lending decisions in the U.S.
On Thursday, FICO, LexisNexis Risk Solutions and Equifax described details of a pilot program currently underway that could eventually enhance the underwriting and origination endeavors of auto finance companies.
Officials highlighted the pilot program allows 12 of the largest credit card issuers in the U.S. to use alternative data to identify creditworthy individuals who would otherwise be unlikely to obtain traditional credit.
FICO is planning to complete the pilot program in the coming months, and expects to make the score based on alternative credit data available to more finance companies later this year.
Based on extensive research, FICO's data scientists found that alternative data such as property records, telecommunications and utility information can reliably be used to score 15 million consumers who do not have enough credit data to generate FICO scores.
By using alternative data from LexisNexis and Equifax, FICO will give card issuers a FICO Score that complies with relevant regulations that they can use to extend credit responsibly to millions of additional people.
“Working with Equifax and LexisNexis, we set out to help unbanked, under-banked and disadvantaged people gain equal access to the standard credit products enjoyed by millions of Americans,” said Jim Wehmann, FICO's executive vice president for scores.
“We’re excited by our pilot program's strong results thus far,” Wehmann continued. “FICO’s focus is on expanding access to credit; not simply scoring more people. Our approach also addresses a paradox for people seeking their first traditional credit product – you often need a credit history before you can get traditional credit.”
Wehmann explained the data used in FICO’s pilot program includes telecommunications and utility bills from Equifax as well as property and public records from LexisNexis. He added this new FICO score is engineered to work alongside existing FICO scores.
The providers went on to mention that card issuers will be able to use the alternative score without having to “rip and replace” existing systems, significantly lowering the cost and accelerating time to market.
“Card issuers are seeking opportunities to safely expand access to credit based on new data sources that are reliable, compliant and predictive and we have received an incredible response to this pilot program," said Rick Trainor, chief executive officer of business services at LexisNexis Risk Solutions.
“LexisNexis data, which the financial services industry has trusted for more than 40 years, provides additional insights about creditworthiness that can help bring millions of consumers into the financial mainstream,” Trainor continued.
Joy Wilder Lybeer, senior vice president of enterprise alliances at Equifax, pointed out how consumers’ activities shown in this new data can help credit card companies, and perhaps down the line auto finance companies, as well.
“The best-in-class telecommunications and utility data available only from Equifax shows that unbanked consumers who, for example, make regular, on-time payments to wireless carriers, may be creditworthy and reliable customers,” Wilder Lybeer said.
“We want to help card issuers identify as many additional creditworthy people as possible, so as to work toward a more financially inclusive and responsible borrowing environment,” she went on to say.
Firms that re interested in learning more about FICO's work with alternative data may contact FICO at [email protected].
