At a time when more and more U.S. consumers have credit histories that are thin or damaged, banks are turning to alternate ways of deciding the creditworthiness of potential borrowers -- including the scoring systems of alternative lenders, according to American Banker.
For example, MUFG Union Bank, which has about 400 branches in California, Oregon and Washington, has partnered with Lending Club to rate borrowers. First, Lending Club performs its usual analysis of the applicants for unsecured loans. Then, if standard measures can't show a borrower to be credit worthy, Union Bank also considers such information as payment histories for utility bills, rent and insurance premiums.
Other banks, including JPMorgan Chase and Royal Bank of Canada, turn to Verde International, which uses a potential borrower's job and educational histories, along with other activities, to identify whether the applicant is living an "organized and structured" life, according to Verde CEO Patrick Reily. That correlates with less risk, including a lower risk of failing to pay back the loan.
Banks are turning to alternative lenders -- and developing their own models and techniques for filling in the gaps in would-be borrowers' credit histories -- because they're now trying to make customers of younger customers who have avoided getting in debt, recent immigrants who may have financed businesses and even homes through private financial clubs, and traditional banking customers whose credit scores took a hit during the far-longer-than-usual recession. Today 56 percent of Americans have sub-prime credit ratings, according to the Corporation for Enterprise Development.
Along with help from startups, banks are progressively trying their own approaches to see what best predicts how safe a customer will be. For example, Regions Bank, which has 1,700 branches across the South, Midwest and Texas, has found that a strong predictor is how good a Regions customer any relative or household member is who has an account or other dealings with the bank. Bank of American, KeyBank and Ally Financial also said they use data on existing customers.
And some input on creditworthiness isn't going to be available on a loan officer's PC screen. New York-based Accion USA, a non-profit microfinance organization, visits the businesses of potential loan customers to see how trustworthy they appear to be, a technique that harks back to the days of small-town banking.
However, that approach can pose a challenge for credit decisions because, as good as a loan officer's sense of a would-be borrower's character may be, it's likely to be too subjective to pass muster under fair-credit laws that allow consumers to dispute information in their credit files that they say is inaccurate.