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Study: Incorporating Rental Payments Gives a Better Picture of Credit Risk

Experian, announced that its latest analysis has uncovered how the addition of rental payment data to credit files can help financially exclude consumers gain access to traditional financial services.

Low-income families often lack access to financial services that middle-income families take for granted, according research compiled byThe National Poverty Center (NPC) at the Gerald R. Ford School of Public Policy at the University of Michigan. There are a number of reasons why low-income families tend to be unbanked. Financial institutions frequently require credit checks to open an account, set high minimum account balances, and have high overdraft fees—characteristics that are ill-suited to those living paycheck to paycheck or on government assistance.

Experian was the first credit reporting agency to incorporate on-time rental payments to its database. To show the value of adding alternative data to credit files, the company conducted an analysis to examine how rental trade lines impact credit file thickness, risk segment migration, credit scores, and the ability to score previously unscoreable residents.

“Financial exclusion is a term that describes the lack of access to basic financial services. Being denied the opportunity to have low-cost loans or even a bank account is a reality for many Americans, and they are forced into using alternative services to conduct simple transactions,” said Brannan Johnston, vice president and managing director at Experian RentBureau.

“Adding on-time rental payments to credit files may help those who operate primarily on a cash basis to integrate into the banking system and establish a credit history that they can leverage to receive more affordable credit and improve their economic well-being.

To conduct the analysis, Experian RentBureau gathered rental payment data from its database, which is comprised of both positive and negative rental payment data. Experian incorporated the on-time rental payment data reported to Experian RentBureau into Experian credit reports. Nearly 20,000 leases, as reported by property management companies to Experian RentBureau, were found that met the desired criteria, including the receipt of housing subsidies on the lease and positive lease payment behavior. Subsidized leases with negative rental payment history specifically were excluded from the analysis.

The research also showed that 19 percent of study participants previously considered subprime migrated to at least one higher (less risky) risk segment, typically yielding more affordable credit and additional credit opportunities. The analysis further revealed that 97 percent of the previously no-hit (and credit unscoreable) residents fell in one of the two least risky risk segments with the addition of the paid-as-agreed rental trade lines.

About Author: Derek Templeton

Derek Templeton is an attorney based in Dallas, Texas. He practices in the areas of real estate, financial services, and general corporate transactional law. His experience includes time as an Attorney Adviser for the U.S. Small Business Administration and as General Counsel for a nonprofit organization in Dallas. A self-avowed "policy junkie," he has a keen interest in the effect that evolving federal policy has on the mortgage, default servicing, and greater housing industries.

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