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1 1 (February 8, 2024)

handle is hein.crs/goveohf0001 and id is 1 raw text is: Congressional Research Service nforming the IegisIative diebate since 1914 0 February 8, 2024 Fannie Mae and Freddie Mac Adopt Alternative Credit Scores Fannie Mae and Freddie Mac, government-sponsored enterprises that collectively guarantee the default risks for a large share of U.S. single-family mortgages, are adopting scoring metrics that incorporate available rent, utilities, and telecom bill payment data when assessing the default risks of mortgage applicants. This In Focus reviews the motivation for and some issues pertaining to this transition. Background: Traditional Versus Afternative Credit Scores A consumer credit score is a numeric metric used by lenders to determine the likelihood of default on a consumer loan. Consumer scores are computed using information obtained from one or more consumer reports. Such information, collected by nationwide credit reporting agencies (CRAs), includes consumers' credit repayment history, the amount of outstanding debts relative to credit limits, the length of credit history, and the frequency of new credit requests. From these data, consumer credit scores can be generated, representing the likelihood that prospective borrowers will repay their loans in a timely manner. Borrowers with higher credit scores are considered more creditworthy, meaning that they are less likely to default on their loan obligations. Credit scores, therefore, influence consumers' credit access and loan terms. The Consumer Financial Protection Bureau (CFPB), however, used data from December 2010 to estimate that approximately 11% of the U.S. adult population was credit invisible, meaning that they had no credit tradelines (i.e., credit bureau records) at any of the three largest credit bureaus (i.e., Experian, Equifax, and TransUnion). The CFPB also estimated that an additional 8.3% were nonscorable, meaning they had thin (e.g., short or outdated) credit histories that cannot be used to compute accurate credit scores. Hence, updating conventional scoring metrics with additional non-credit repayment tradelines may enhance credit access. Specifically, alternative credit scores are consumer metrics that incorporate information not generally incorporated into traditional credit scores, such as recurrent non-credit payments for rent and utilities. (See CRS In Focus IF 11630, Alternative Data in Financial Services, by Cheryl R. Cooper.) The more comprehensive payment history may enhance the predictability of consumer metrics. For example, individuals without rent tradelines can still have rent debts in collection reported to credit bureaus by third- party debt collectors. (For more information, see CRS Report R46477, The Debt Collection Market and Selected Policy Issues, by Cheryl R. Cooper.) In these cases, determining repayment risk based upon isolated negative incidents may not be as accurate as using more comprehensive histories showing consistent payment patterns over time. Rent Reporting Developments Before alternative credit scores are computed, rent payment histories must first be collected and digitized. Before the 2000s, rent was largely paid via either cash or check rather than electronically. Renters could request and retain dated receipts from landlords for payment verification. For tenants who paid their rents via check, their (paper) bank statements could serve as official verification. Although loan applicants could turn over receipts and bank statements for review by lenders, papers can get lost, be damaged, and take time to be reproduced. Over the past two decades, however, more rents are being paid by electronic means (e.g., debit or credit cards, rent payment apps), thus enhancing the ability to collect and report these data for generating alternative credit scores. Although rent reporting is not yet widespread, recent trends indicate that it may expand. Rental payment data have largely been reported by property management companies or landlords of multifamily properties (e.g., those with at least five or more residential units)-particularly large apartment complexes. Property managers that screen numerous tenant applicants over the course of a year are more likely to find a database of rent payment behavior patterns useful. Moreover, the per unit costs of financial reporting decreases with the volume of reporting. Consequently, property management companies (relative to small landlords) are more likely to participate in the reporting of rental payment information, thus supporting the growth of the rent reporting industry. Some states and localities are experimenting with rent reporting for landlords, primarily focusing on residents receiving housing assistance or with low incomes. For example, these pilot programs often require landlords receiving local, state, or federal housing subsidies to offer to their tenants the option to have their rental payments reported. Under these pilots, state housing authorities are also required to offer rent payment reporting options to tenants who either reside in properties under their administration or receive state housing vouchers. Fannie Mae and Freddie Mac, collectively known as the Enterprises, provide liquidity to U.S. single-family and multifamily mortgage markets. The Enterprises have encouraged their borrowers of multifamily loans (e.g., owners of apartment buildings) to report timely rent payment data of tenants to a vendor that subsequently forwards the information to credit bureaus. Fannie Mae offers to pay one year of fees directly to the vendor. Freddie

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