Credit data changes spur loan growth

UPDATED: 12/2/2015 3:09 pm ET - corrected

Editor's note: An earlier version of this story misidentified the origin  of the credit model used before 2000 by Fannie Mae and Freddie Mac. The model came from FICO.

The rising number of auto loans could in part be a result of changing credit scoring methodologies and the use of alternative data.

Credit bureau data consistently show that auto loan balances and originations are growing. Experian says total auto loan debt reached $968 billion in the third quarter, up 11 percent from the year-earlier period. Meanwhile, Equifax reported that through July auto originations reached $341.2 billion, up 9 percent from the first seven months of last year.

Robust U.S. auto sales, coupled with dealers and lenders expert at their business, likely accounted for most of the auto loan increase. But changes in how credit data are evaluated also may have spurred the gain.

Before the 2000s, all lenders, including Fannie Mae and Freddie Mac, were limited to a FICO model used to score the risk on most loans because FICO was the only credit scoring company around at the time. That model used data that did not score positive rental payments but did score medical collection accounts. As a result, lenders had less ability to assess consumers with limited credit histories than they have today.

In 2006, Equifax, Experian and TransUnion formed a joint venture -- VantageScore -- that incorporated rent, telecommunications services and utility data into credit scores that year. (FICO followed suit in 2014.)

By 2010, VantageScore was using 45 million credit files, about double its previous amount, to predict and assess creditworthiness, the company said. And by 2014, both FICO and VantageScore ignored paid medical collections.

Today, VantageScore and FICO have 13 different scorecards, including bins dedicated to consumers with thin credit files.

About 10 million of VantageScore’s “new score” customers are near prime and prime because of more predictive data.

New-score customers are those who just entered the credit market, use credit infrequently, have no recent activity or have no open trades, VantageScore said.

Nine-and-a-half million Hispanics and African American consumers that were unscorable previously can now be scored. Of those customers, 7.5 million have a VantageScore of 600 or higher, which puts them in the nonprime credit category, above subprime and deep subprime.

Alternative data

Lenders also use alternative data to identify consumers’ monthly payments that the credit bureaus do not account for. They also verify income and job tenure using employment data services.

"No score" consumers are receiving more loans, Equifax said in a statement accompanying a third-quarter loan report. The median write-off rates for no-score originations from 2012-14 were 22.8 percent lower than they were from 2007-09, according to Equifax.

“Traditionally lenders have used consumer-provided pay stubs to confirm income or conducted no verification at all,” said Lou Loquasto, auto finance leader for Equifax. “Utilizing verified income and alternative data provides the complete picture of a consumer’s financial standing, allowing lenders to see consumers’ true income, payment obligations and other attributes such as job tenure to determine if they have the ability and stability to keep up with payments.”

There are multiple factors contributing to a strong auto lending market. The obvious contributors are heightened vehicle sales and savvy dealers and lenders. But there is another factor to remember when looking at auto loan growth: Credit reporting companies’ modifications and alternative data give more consumers the chance for loan approval.

You can reach Hannah Lutz at hlutz@crain.com

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