Subprime mortgage lenders have not gone away. They're just getting new tools in order to reach the poorest borrowers.
The creditworthiness of Americans has taken a beating in recent years, exacerbated by record numbers of foreclosures, bankruptcies and defaults. But worse consumer credit has not stopped the lending industry's hunger for new sources of profit. In order to tap a new pool of borrowers, mostly those who do not qualify under existing reporting methods, credit reporting companies have been busy creating new formulas to evaluate them.
The latest new tool is the awkwardly-named "FICO Mortgage Score Powered by CoreLogic." CoreLogic is a credit and consumer data analysis company that provides information to lenders. The new score is a measurement for mortgage companies, who can use it to evaluate additional loan applicants, the company said.
According to the CoreLogic's press release, the new score can help companies approve more loans, adding up to as much as $14.5 million in new revenue for a top-20 lender.
The new mortgage lender score combines a traditional FICO score with a supplemental score called CoreScore, a credit formula that debuted last fall from CoreLogic. CoreScore looks at financial records such as credit card borrowing, bank transactions and mortgage information, and examines the kinds of transactions likely to occur at the lower end of the income scale. These include car and rental payments and payday loans. The score even examines the record for missed child support payments.
Calling the current lending environment "complicated," Tim Grace, senior vice president of product management at CoreLogic, said in a statement that these new sources of data are designed to give a better picture of a consumer's credit risk and assure lenders.
For some borrowers who have had a few hard knocks to their credit in the last few years, a new score could be a good thing and help them get back into homeownership. However, it could also be used to justify higher rates for other mortgage borrowers, since the new expanded report could reveal other behavior deemed risky, like taking payday loans.
Consumer advocates have also worried that CoreScore uses sources of data, like public records, that could be flawed or inaccurate.
As the mortgage industry looks to tap a deeper pool of borrowers, other kinds of financial services are doing the same. Experian, a data collection and credit reporting bureau, launched a new credit score in June called Extended View, targeted for use by banks, credit unions and auto lenders, as well as phone and utility providers. Experian says the new score could bring as many as 64 million new borrowers into the lending fold.