Trended Credit Data is Here
Trended Credit Data is Here
Trended credit data is making waves in the mortgage industry as a new way for creditors to view applicant’s applications for credit. In traditional models, credit is viewed by an underwriter as a snapshot in time, whereas ‘trended credit data’ has been created to give a risk manager a fluid view of credit history. A good analogy would be that traditional credit models are a photo of someone’s finances, and trended credit data is a video.
What is Trended Credit Data?
Trended Credit Data is reporting of information not only at a given point in time, but how information and data has trended historically for a period of 24 months prior to a credit inquiry. Trended credit data shows not only if someone has paid their bills on time, but how much they paid toward their balance. Minimum payment? Extra? Paid the balance in full? Trended credit data shows all of this.
Trended Credit Data is coming to the Mortgage Industry
Transactors VS Revolvers
Trended credit data was created to separate borrowers into separate risk classes depending on not only payment history, but payment behavior. The result is what credit bureaus and creditors are referring to as ‘transactors’ and ‘revolvers’. A transactor is someone that operates (historically) in transactions – the folks who run up credit then pay it off entirely or in large chunks at a time. They complete transactions again and again, and pay them down or off. Revolvers are those people who run up credit and carry balances, making minimum payments over long periods of time.
The idea behind transactors VS revolvers is that revolvers carry a higher credit risk since they often rely on debt and don’t have reserves to cover those debts should a financial emergency come along. Transactors, on the other hand, are those folks utilizing credit as convenience more than necessity.
Potential Problems?
Despite the time and money put into credit and credit decision making, the system has never been perfect. The implementation of trended credit data won’t change that. Once trended credit data becomes more widely used across many industries, problems will reveal themselves, but even before broad implementation, there are a few scenarios that seem problematic to the equation. The investor, for one, could be punished for being a “revolver”. If someone has a mortgage and is making only the required payment, and not a dime more, each month, they could be viewed as a revolver as it pertains to that account. In reality though, perhaps this individual is taking advantage of a low-rate, deductible debt, and is investing money each month into higher yielding investments. This is prudent financial planning and indicative of an individual very intelligent and responsible in their finances, however in the eyes of a credit report, they’re a revolver.
If trended credit data becomes factored into credit scores, we’ll see far more borrowers with lower FICO scores, and therefore higher rates on everything from credit cards to mortgage loans. 0% offers from credit card companies could become problematic, as someone could enjoy paying a 0% minimum payment on a large purchase over the course of 24 months, and appear as a revolver in the eyes of trended credit data. They are, like a prudent investor, punished for being financially savvy. Someone with very slim debt to income margins could, on the other hand, be rewarded for paying off debts in full each month with regard to credit scores, when in reality leaving themselves cash-starved could result in financial disaster with a layoff, medical emergency, or needed home repair. Does this “transactor” really pose less risk to a financial institution?
Trended Credit Data and Your Mortgage Application
For the time being, plans are in place for automated underwriting engines to begin factoring in trended credit data with risk analysis, but initial announcements and data suggest the amount of automated mortgage approvals should not vary with the implementation of trended credit data. Further, underwriters are not required to analyze trended credit data when determining an applicant’s risk. That is, for the time being the new trended credit data system is there simply for the algorithms to decide who should or should not get a loan when the application is reliant on automated systems. Underwriters should not analyze whether an applicant makes minimum payments, carries balances, or pays off debts in full each month.
For most mortgage applicants, trended credit data will not represent any changes to the loan process or their prospects at approval, but for folks on the fence with questionable credit history, trended credit data may cause some applicants who would previously be approved to be denied a loan approval. On the flip side, some applicants who may have been denied before will be approved under the new model.
Long term, it remains to be seen what the total effect will be from the use of trended credit data. The system is still in its infancy, and lenders and underwriters should adapt quickly (credit reports currently show trended data so it’s not going to surprise anyone when automated systems begin relying on it). From an originator’s perspective, trended credit data analysis is simply replacing one very imperfect system with another imperfect system as credit bureaus strive to meet lender’s demand for risk management solutions – and like every other change we’ve seen since government regulations began to shape the mortgage industry, it will come at the expense of the consumer.
