Credit report

Increase Black Homeownership Rates with Alternative Forms of Credit

BLOG VIEW: Home ownership continues to be one of the main generators of wealth in our country. Yet strong barriers to home ownership for minority consumers and marginalized groups remain.

According to a recent Zillow analysis of Home Mortgage Disclosure Act (HMDA) data, black Americans continue to be excluded from this opportunity due to segregation policies, further entrenching the generational racial wealth gap.

According to this recent study, black applicants are denied mortgages at 84% higher rates than white applicants. This is a significant jump from 2019, when the gap was 74%.

While black homeownership rose before the pandemic, it has recently started to fall again, largely due to a growing gap in mortgage approvals between black and white applicants.

In the United States in 2020, 19.8% of black applicants are denied a mortgage, which is the highest of any race.

Research has shown that communities with a high rate of home ownership tend to prosper and be more resilient economically, with children and families more likely to prosper and
build generational wealth.

However, the black community continues to face challenges obtaining a traditional mortgage, given their financial situation and the credit data currently available.

According to the Consumer Financial Protection Bureau (CFPB), 26 million Americans are “credit invisible,” meaning they either don’t have an established credit history or live with subprime credit (scores below 668) . 19 million more are “thin-file” consumers, with too little data to produce a traditional credit score.

CFPB data shows that black consumers are significantly more likely to be credit blind or have unrated credit histories, compared to white consumers. About 15% of black consumers are currently classified as invisible credit, compared to 9% of white consumers. Additionally, 13% of black consumers have unrated records, compared to 7% of white consumers.

The limited availability of traditional financial services in black communities is a major contributor to this problem. Historically, black communities have a greater number of non-traditional services, such as payday lenders, which contributes to poor credit health. Insufficient credit remained the most common reason for black mortgage denials in 2020.

To help alleviate this problem, the mortgage industry, including GSEs, mortgage cooperatives, lenders and mortgage technology providers, is working to bring greater inclusion and understanding to the mortgage process.

The key is to provide access to specific data and programs tailored to these groups. While credit reports remain a strong indicator of credit history and past financial reliability, Fair Credit Reporting Act (FCRA) compliant information that is not included in traditional credit report data has the potential to help responsibly expand consumers’ access to credit and support a more inclusive economy. .

Access to this alternative data, such as rental payment history, utility payment information, and even cell phone and cable billing data, can provide additional information for a more complete financial picture of the borrower. This data could have a big impact, as around 92% of black adults own cellphones.

Rent payments, which are currently not reflected in traditional credit reports or credit scores, are often one of the largest and most consistent bills millions of consumers pay. With more than 42.9 million households currently renting in the United States, and 20.3% of those being Black families, including rental payment data could help unseen first-time home buyers. credit in this marginalized community.

The challenge is to report this data in an accurate and standardized way. Nearly 50% of rental properties are managed by large and/or national property management companies, the remaining 50% of rental properties are managed by individual landlords or local property management companies, and there is currently no process standardized allowing them to report this in a realistic way. The data.

Although it can be difficult to access and compile, rental aggregators that take the time to provide rental payment data to consumer credit reporting agencies are helping to create a sense of well-being. financial support for communities, while providing individuals with the opportunity to establish and build a credit history based on something they already do – pay their rent on time. Showing a positive and consistent rent payment history can not only demonstrate a consumer’s ability to make future mortgage payments on time, but also help that consumer access the credit they deserve at the end of their term. account.

Reworking the existing credit system to make it fairer and including alternative data and information not currently included in credit scores could help black applicants and marginalized communities benefit from home ownership and the creation of wealth. With the advancements that the industry is already capable of expanding, more and more Americans will have the opportunity to contribute to the engine of our national economy and enjoy financial security.

Jennifer Henry is Managing Director and Group Director for Government Credit, Capital Markets, and Mortgage and Housing Strategy at Equifax.