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For those of you who were hoping, and maybe believing, the CFPB and their Director, Richard Cordray, were going away, it looks as though that may not happen anytime soon.
CFPB just announced plans to hold public hearings on the potential for use and the benefits of non-traditional sources to establish a consumer’s credit profile for lending purposes.
Today, most lending requires the borrower to have a traditional credit score. This presents a major barrier to loans for approximately 45 million consumers who today do not have a score or a credit history.
The intent is to allow the use of alternative credit sources, like rent and utility bills, to allow a consumer to develop a credit profile acceptable for lending.
Certain programs offered today by Fannie Mae and Freddie Mac allow for this type credit profile on a limited basis.
It’s a nice idea and one that could increase the potential for more lending. This is especially true at a time when refinancing and homeownership rates are declining.
The questions are:
- Will such alternative credit profiles help or hurt consumers and lenders?
- Is it smart to provide someone who has limited credit experience with the biggest financial debt of their lifetime?
Everyone wants to see those who can qualify, afford, buy and maintain a home realize their dream. However, are they ready to take on such a responsibility?
It’s not only buying the home, it’s the added cost of homeownership that usually creates the problems. A failed heating system, a roof leak, and wham the consumer’s in trouble.
The idea is a good one. But, we need to tread carefully. It does no good to loosen lending requirements to increase homeownership, if, in the end, the consumer defaults and ruins their fragile credit profile.
BTW, how will the use and interpretation of this non-traditional credit profile be viewed under the QM/ATR rules? Remember them?
