As a consequent result of high unemployment rates and credit card debt, many consumers have seen their credit scores plummet, making it nearly impossible to secure loans.
Recent reports show that nearly 43.4 million Americans carry a credit score of 599 or below. As a result, lenders and institutions are desperately seeking other relevant data to determine the credit risk of a potential borrower.
"In the marketplace right now everyone is talking about rethinking underwriting," Oliver Wyman management consulting firm partner Peter Carroll told financial website Collections and Credit Risk. "Everyone realizes that credit scores, as clever as they are, have in some respects left out of the credit-assessment equation certain aspects of the borrower," he added.
According to the website, some banks are utilizing portals such as LexisNexis to procure information about borrowers from public records and credit bureaus. Through the use of these records, lenders can see information such as the consumer's property values, educational background, previous bankruptcies or tax liens, phone records, subprime credit information and even professional licenses, the website reports.
"Basically people are saying we can either go back to human underwriting, which is cost-prohibitive and not that good anyway, or we can find data sources that potentially shed light on these other dimensions of the borrower," Carroll told Collections and Credit Risk.
Many analysts say that as lenders try to find a way to balance tightening underwriting standards and the financial reality of the economy, institutions may be going overboard. A recent Wall Street Journal article highlighted this rigid lending framework after a man who was gainfully employed, had an excellent credit rating, carried a sizable pension and savings account and had sufficient equity in his home was denied a refinance loan due to an investment loss listed on his tax form from two years prior. Despite his enviable financial condition, lenders determined that the loss made him a credit risk.
Because lenders are requiring borrowers to provide so much additional information, consumers should work to improve their credit scores and ensure that all the information listed on their credit report is accurate. Paying down debt, making on-time bill payments and limiting the number of credit cards they apply for may improve their scores and give them a better chance of securing financing in the future.