LexisNexis Risk Solutions on Tuesday announced the results of an inaugural study that it believes provides the first holistic view of lender, consumer and regulator attitudes on the use of alternative credit decisioning tools to evaluate consumer creditworthiness.

Alternative data not included in credit bureau reports could have generated $1.7 billion for credit card issuers and $1.9 billion for auto lenders in 2012 alone. The study also reveals that auto and credit lenders, consumers and regulators are embracing the benefits of using alternative data in credit decisioning.

The report, “Evaluating the Viability of Alternative Decisioning Tools: A Study of Auto and Credit Card Lending Markets,” conducted by Javelin Strategy & Research, provides insights on the emerging category of Alternative Credit Decisioning Tools (ACDTs) built on consumer information that doesn’t appear on credit bureau reports to predict creditworthiness. This information may include public record information such as property values, professional licenses and other consumer data.

Findings from the study show that ACDTs provide viable options to evaluate young individuals who are just gaining financial independence; low-income consumers; thin- and no-file consumers; and – most prominently -- a growing population of “underbanked” consumers with nontraditional credit histories.

“While independent studies show the predictive capacity of alternative data tools, there hasn’t been a comprehensive view into the societal, economic and regulatory effect of their implementation until now,” said Mark Luber, vice president, data and analytics, LexisNexis Risk Solutions. “The study points out that while lending is currently rebounding from an economic recession, traditional measures of creditworthiness are falling short and consumers are defying prerecession risk categories.”

The study also explains that alternative data is already being used with success in the U.S. marketplace, and consumers are familiar and comfortable with it. 

Ninety-three percent of all consumers have applied for a credit card and/or auto loan at some point in their lives, and nearly 9 out of 10 applicants were engaged in an underwriting process in which they were asked to actively provide information beyond the basics of DOB, name, SSN, and which is not part of a traditional credit report.  When asked to identify the components of a credit score, three out of five consumers selected a combination of traditional and alternative credit-scoring factors.

Consumers that could benefit from ACDTs represent an underserved market, which are more difficult to evaluate through traditional methods and encounter great obstacles to obtaining credit than all other consumers.

To compensate for the deficiencies of traditional credit scores, lenders undergo an intensive manual underwriting process to gather supplemental information for consumers with blemished or insubstantial credit histories.

Auto and credit lending executives interviewed in the study have positive views on alternative data. The primary reason cited by all categories of auto and credit card lenders for adopting alternative credit-scoring solutions is to increase the precision of their risk assessment methods and generate lift on their portfolios. 

In fact, one large auto lender interviewed in the study said it increased its booked loans from 8% to 15% for thin and no-file customers.

Regulators are optimistic that ACDTs will increase access to credit and loans and improve the economic inclusion of underserved segments, and are also focused on ACDT’s compliance with the Fair Credit Reporting Act and the Equal Credit Opportunity Act.

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