Changing consumer behaviors create need for alternative credit data

As this blog has covered extensively, data reported to the credit bureaus has traditionally been relied upon by lenders to evaluate consumers' creditworthiness, but more banks today are expanding their number of data sources they review when making these evaluations.

The primary motivator behind these trends is the fact that consumer payment behavior has shifted, and lenders depending on only traditional data during the application processing stage may not be receiving the most honest assessment.

"Traditional credit data and analytics continue to be relevant, but are not sufficient to satisfy the consumer credit reformation of today," said Craig Focardi, senior research director for CEB TowerGroup in a press release. "As a result of the changes in consumer behavior, lenders cannot revert back to their prior mortgage underwriting policies. Too much damage has already been done to the market, consumers, shareholders and investors."

Focardi's organization released a study at the beginning of November which showed that evaluating credit applicants using data related to payday loan payments and histories with unsecured credit and property history could empower lenders' ability to improve mortgage lending volume. This could be a crucial asset at a time when more banks are looking for ways to encourage lending.

Purchase applications remain on the decline

The most recent weekly applications report from the Mortgage Bankers Association showed that volume for purchase applications dropped 0.3 percent for the week ending October 26. That followed an 8 percent decline the previous week, demonstrating the lack of new mortgage volume at lenders nationwide.

However, improving applicant assessment strategies with sophisticated credit application software could be the solution more lenders need to reinvigorate originations activity. With a better perspective into applicants' creditworthiness, lenders can begin to identify stronger consumers and weed out potential risks.

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