By John Flynn, Open Lending President & CEO
As technology has evolved in recent years with data moving to the cloud and processing power increasing at a lower price point, lenders now have the ability to leverage larger data sets to make smarter loan decisions.
When credit unions and banks choose to leverage alternative data to make lending decisions, you get a more accurate view of the potential borrower. Gathering data beyond credit score and income is critical to making pricing decisions. We can dig into trends and get an idea of their general behavior, inferring what that indicates about them. Additionally, these data provide information to validate or refute other information the customer has provided and stamp out fraud.
We at open lending don’t recommend it can replace credit files, but it’s highly effective information for augmenting them. For consumers with little to no credit history, additional data can be a huge benefit to both sides of the lending equation. We can gather information about the potential borrower, such as utility bills, rental payments, lease terms and more to give a true picture of their ability to deliver on their commitments. These services may or may not appear on a credit report, but they do speak to the consumer’s willingness and ability to meet their financial obligations. Mixing in additional data increases your potential market and gives the institution insight into the borrower’s financial universe.
In a world with a fluctuating economy, a flat credit rating may not provide a full view of your prospective customer. They could be recovering from a recent job loss and have taken a hit on their credit scores to make ends meet. Now that they have started to recover from that crisis, they are still being judged for a temporary setback in their financial lives. By looking at a more complete picture, lenders can garner a broader perspective of their recovery. Lenders will be able to better price for the risk potential borrowers represent, and borrowers will receive better pricing than at lenders who only use credit scores.
Alternative data, such as we use at Open Lending to help you say ‘yes’ to more auto loans, isn’t meant to replace FICO data, but rather strengthen it and round out the picture. In many cases, it can explain the hardship a consumer was experiencing and help put you in a place to aid their recovery. Ultimately, these potential borrowers who are currently credit challenged can still be valuable, long-term users of your financial institution when your bank or credit union takes the time and effort to better understand their individual situation.
Open Lending can help perform this advanced data analysis quickly and easily, so your institution and borrower can get back to what you all do best. Supplementing credit scores with alternative data is a win-win.