MARK CATONE
Data difficulties

In an ongoing effort to cater to consumers with nontraditional credit, MassHousing, a quasi-public agency that functions as the state’s affordable housing bank, has become the first lender nationwide to implement a new method of credit scoring. The pilot program, Anthem Score, was created by California-based First American CREDCO and is specifically designed to help mortgage lenders and investors better gauge the credit risk posed by borrowers with little or no credit history, or income and ability to repay that is difficult to assess.

“This new and innovative credit score will give more low- to moderate-income homebuyers – and immigrant homebuyers, in particular – a better chance to qualify for an affordable mortgage loan,” said Thomas R. Gleason, executive director of MassHousing. “Too often, consumers who don’t have a traditional credit history fall prey to predatory lenders and end up paying higher interest rates and fees. But thanks to First American’s Anthem Score, we can now offer these buyers loans with more reasonable terms, helping them to achieve the dream of homeownership at a price they can afford.”

According to Mark Catone, senior vice president of First American’s Credit Information division, the company developed a process that includes fraud prevention and information verification – ingredients that are vital to lenders and investors to ensure the soundness of loans.

“MassHousing can demonstrate to their investors that their underwriting process has good integrity to it,” Catone said. “They’re first to see the value.”

Before Anthem Score, which stands for Assisting Nontraditional Homebuyers in Emerging Markets, compiling information for nontraditional credit histories was a tedious and time-consuming process at best and often produced uncertain results, Catone said.

“The industry has traditionally assumed very high risk through a rather informal collection and verification process for nontraditional credit, making it virtually impossible to score the information,” Catone said. “The key to our ability to deliver a nontraditional score is the rigorous verification standards and consistency we apply in compiling data. Anthem Score not only represents an accurate and reliable score for loan applicants that lack traditional credit histories, it is the first to exceed existing lender and investor standards for preventing fraudulent information from being used in establishing credit.”

Anthem Score works this way: First American works directly with the consumer on behalf of the lender. By compiling a consumer’s records, including rental payments and phone and utility payments, First American can verify such information with the creditor.

“We’ll verify that data is accurate and that those entities actually exist,” Catone said. “The verification ensures we have data that is appropriate.”

Once the data is collected and verified, First American applies a unique credit score that it has created. It is calculated much like today’s standard credit scores but is weighted based on the type of information and payment history that is available.

“Rental history lends itself very well to a consumer paying a mortgage,” Catone said.

For a better score, Anthem Score views 18 months or more of rental history as strong. Utilities or insurance payments with histories of 12 to 18 months weigh more heavily and equate to a higher score.

‘A Social Issue’

The mortgage industry treats borrowers with nontraditional credit differently, in large measure because credit scoring for such would-be borrowers often does not fit standardized procedures. However, Catone said the industry should not be treating them differently.

“We don’t claim to have a [complete] solution to this issue,” he said.

First American is solving the problem incrementally by providing new tools to lenders and the scoring method is a mechanism to help lenders streamline the process of weighing credit reports, Catone said.

If a lender cannot locate a traditional credit report for a potential borrower, Catone said the institution can contact First American via telephone or online and order the Anthem Report, the company’s credit report, which is designed to meet secondary market requirements as set by investors for borrowers with little or no credit history. First American will then contact the borrower directly and compile the necessary information.

The Anthem Score and Anthem Report are segments of Anthem Suite, which was designed to “help expand the availability of A-grade mortgage financing to loan applicants with little or no traditional credit history.”

MassHousing, the leading provider of affordable housing in the Bay State, has just begun rolling out Anthem Score and is letting lenders know it will accept the alternative score for borrowers without traditional credit. According to Peter Milewski, director of the Mortgage Insurance Fund at MassHousing, lenders will now be able to send an Anthem Score instead of compiling piles rent receipts, checking account statements and wading through old phone bills to ascertain whether a borrower qualifies for a loan backed by MassHousing.

“Anthem Score standardizes the process,” Milewski said. “We can give our lender a very useful tool.”

Hoping Anthem Score will encourage lenders to look at nontraditional borrowers as “eligible” and “worthy,” and not necessarily candidates for subprime loans, Milewski stressed that Anthem Score will help lenders process loans quicker and increase the ease of doing business.

Although Anthem Score is just hitting the market now, Milewski said MassHousing has been struggling with the issue of nontraditional credit histories for some time. Faced with the challenge of seeking out what was available in the marketplace, Milewski said his search for a solution and First American’s introduction of Anthem Score came at the same time.

“I hope MassHousing lenders will see us as a leader in terms of addressing a social issue affected by lending,” Milewski said. “We’re pleased to be one of the first nationally recognized lenders to commit [to Anthem Score],” he said.

Besides making it easier for lenders to better evaluate borrowers, the Anthem Score can help borrowers, too.

“[It will] broaden our reach into an area that has been victimized by predatory lending,” Milewski said.

There are some drawbacks, however. Milewksi points out Anthem Score is a pilot program and both First American and MassHousing are breaking new ground.

Both Milewksi and Catone said this type of scoring will likely expand into the marketplace over the next few years, but it is far from mainstream at the moment. Currently, there are some obstacles preventing the scoring from becoming the norm.

“We need to have data before we can actually develop the score,” Catone said, adding that the company is still refining the process and scoring methodology.

Milewksi said once data is more readily available and confidence in the information is established, he expects alternative credit scoring models like Anthem Score will become more standardized, trusted and accepted.

Also, in an age beset by increasing risk of identity theft, more companies are simply not giving out personal information, making the collection of data ever more difficult.

“We’re seeing a trend of [potential sources of credit information] locking down data,” Catone said.

Having the information available in reliable databases would increase the efficiency of what First American is trying to do, according to Catone.

“If data was made available electronically, we could automate credit reports in a very elegant way,” Catone said.

Jennifer Jope may be reached at jjope@thewarrengroup.com.