As Ken Riemer, an Alabama attorney who does pro bono work, recently got ready to meet with residents of the homeless shelter in his neighborhood, he assumed most of their questions would be outside his consumer finance practice, and would perhaps ask about government benefits, family law or criminal issues.
“I was shocked to find out that most of the problems had to do with credit reporting — right down my alley,” he said. Six of the 10 people he met with that day were living in the shelter solely because a rent-related credit reporting issue had shut them out of the housing market. In some cases, this was due to a single late payment.
“These are folks with enough income to pay market, nonsubsidized rent, but were nevertheless forced to move their families into a homeless shelter simply because their credit history disqualified them from renting,” Riemer said.
Lenders are now making more use of rent data in credit decisions. The data itself is becoming more available from credit bureaus and other data providers, and Fannie Mae and Freddie Mac are now willing to buy loans that rely in part on this data, provided lenders obtain consumers’ consent and that they only use the data in a positive way.
For people who have a low credit score or no credit score, lenders’ use of rent payment data in credit decisions can open doors. Lenders can see that a potential borrower has been paying her rent consistently for the past two years, and decide she’s responsible enough to handle a loan.
But if not done with care, the use of rent payment data in credit decisions could harm some consumers, especially the most vulnerable, said Chi Chi Wu, staff attorney at the National Consumer Law Center.
“Black and brown and consumers of color are disproportionately the ones affected by things like evictions,” Wu said. “While they tend to be renters, a lot of them also struggle with rent, especially during the pandemic.”
At the homeless shelter in Riemer’s neighborhood, in some cases, what actually happened is in dispute. A landlord decides a renter didn't give proper notice and asks for an extra month’s rent. The renter thinks she doesn’t owe it and already put money down on a new place. In one case, a landlord claimed a renter was responsible for damage to an air conditioning unit, while the renter insisted she was not.
The heightened concern among renters is that landlords are consolidating and becoming larger and more powerful.
“The bigger companies have systems that allow for less and less deviation by human beings,” Riemer said. “So if the system thinks you're late, whether you really are or not, then that's what gets reported to the credit bureaus.”
Tenants who’ve had issues such as temporary unemployment, perhaps due to pandemic-related shutdowns, or a stretch of bad luck such as a family member who needs care, can also be affected.
“Over the long haul, these folks have enough income to be responsible tenants and otherwise pay their bills,” Riemer said. “But because of systematic institutional automated credit reporting, that follows you for seven years.”
Riemer tries to help resolve these types of disputes. “But where the delinquencies are accurate, there’s not much to do other than wait out the seven-year period,” he said. “I’m keenly aware of the outsized role credit reporting can play in keeping folks in difficult financial situations in general, but I was shocked to see a direct connection to something as extreme as homelessness."
For the most part, rent payment data is not reported to credit bureaus today, noted Karan Kaul, principal research associate at the Urban Institute. Less than 5% of renters’ payment history is reported to the bureaus, he said.
“In cases when it is reported, it is usually when someone has fallen behind on their rent payment,” Kaul said. “Landlords haven't historically reported rent payments to the credit bureaus if you've been making your payments, but then the day you fall behind and you miss a month or two of payments, that's when you get reported. It just seems very, very unfair.”
Positive uses of rent data
Fannie Mae and Freddie Mac have both agreed to buy home loans that take into account rent payment data. Lenders can extract information about a potential borrower’s 12-month rent payment history from their bank accounts, with the consumer’s permission, allowing them to approve people they might otherwise deny. Fannie Mae began accepting such loans in September; Freddie Mac will start July 10.
In late June, Fannie Mae reported that since it began allowing the use of positive rent payment data, more than 2,000 loan applications have become eligible for loans that otherwise would not have been. Of these, approximately 41% of the borrowers identified themselves as Black or Latino/Hispanic.
U.S. Bank is one lender using renters’ data. As at most banks, its loan officers have long considered borrowers’ rent payment history in credit decisions.
In September, the bank began doing this in an automated way. It uses mortgage origination software from Blend that incorporates rent payment history from customers’ bank statements.
Having this process automated is a game changer, according to Tom Wind, executive vice president, consumer lending at U.S. Bank.
“One of the issues that's existed in trying to qualify a customer with rent data is that you have to collect the documents,” Wind said. “You have to get canceled checks and bring them in. Not many landlords report rent to the credit bureaus, so it's a very manual process. The really nice breakthrough here is using bank statement information in the normal credit decision process. It’s efficient for the lenders, it speeds up the process for the borrowers and I think it brings into the mainstream this use of nontraditional data that can result in better outcomes for customers.”
U.S. Bank doesn’t ask applicants for a bank statement. Instead, it asks who the customer banks with, and connects to those accounts through Plaid, Finicity or another data aggregator Blend works with. It then pulls in 12 months’ worth of rent payment history.
“I only know of positive outcomes from this,” Wind said.
Over time, he expects more opportunities will arise to bring alternative data into loan decisions.
“We think this is a really good step in the right direction of doing what we're all focused on doing, which is finding out ways that qualified people who are getting excluded because of the way the rules are structured, can qualify because in the end, we're all about sustainable homeownership,” Wind said.
Using alternative data like rent payments is broadening U.S. Bank’s customer base and making homeownership possible for the first time for a lot of people, Wind said.
“It's doing it in a way that we feel is really responsible, because it's not just broadening the guidelines, it's very specifically picking up people who have a history of being able to afford a payment and saying, ‘You could afford that rent payment, you can do the mortgage,’ ” Wind said.
Wu approves of this approach to rent data, not only because it is positive only and consumers have to opt in, but because the data bypasses the credit bureau, she said.
“That way it can't hurt because this data isn't being dumped into the credit bureau file,” Wu said. “So it can't hurt in terms of use by landlords. It can help those who are ready to make that next step to homeownership without hurting struggling, vulnerable renters who are probably not ready for home ownership anytime soon.”
Pankaj Jain is originally from India and started his career at Citi. The job brought him to the U.S., where it took him three years to get a credit card.
“I would apply and they would say, ‘not enough credit history,” Jain recalled. “I would get a decline letter, then I would apply again. They said ‘too many inquiries’ because I was desperate to get it and applying again and again.” He finally got a card from Capital One.
If any lender had looked at his rent and utility payments, it would have approved him right away, Jain believes.
“There are about 40 million people like me who are thin file, no file or living in the margins,” Jain said.
Jain is now CEO of Scienaptic, a maker of software that lets lenders use AI and alternative data such as rent payments in their decisions. It uses what Jain describes as a waterfall method.
For people who qualify for a loan using traditional underwriting, the software uses data from the credit bureau file. For people for whom such data does not exist, Scienaptic makes available other information such as rent payment history. Rent data comes from providers like LexisNexis or Clarity Services, which is owned by Experian.
Using this additional information, “We are able to pick up those 20%, 30% of the people who are diamonds in the rough from that and approve them,” Jain said.
Where the danger lies
What consumer advocates worry about is what could happen in the future, if guardrails like requiring consumer consent and only using the rent data positively don’t exist.
“If this information is available in the credit bureaus’ credit files, then it could be accessible to all sorts of predators and they might use it to make decisions,” Kaul of the Urban Institute said.
Kaul understands why consumer advocates are reluctant to have rent data widely used because they don't want some of these consumers to get penalized, as many are today. But he also says the potential benefits of the positive use of rent data far outweigh the downsides.
Wu says that in the use of rent data in loan decisions, the devil is in the details.
“It matters a lot how the rent data is used,” she said. If only positive rent data is used with the consumer’s permission, it’s helpful.
Another mantra Wu uses for alternative data is, “do no harm.”
“The harm here comes from including rent payment data on a monthly basis, positive and negative — what they call full-file reporting to the big three credit bureaus,” Wu said. “That's where it could hurt.”
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