Lenders should weigh risks vs. cost in credit options

Mortgage lenders and home improvement contractors using long-term financing should prepare for a shift in how creditworthiness is measured. The Federal Housing Finance Agency (FHFA) is moving toward using VantageScore 4.0 alongside traditional FICO scores. This change is designed to give a more accurate picture of a borrower’s financial health, but it introduces new choices for lenders regarding cost and data depth. For business owners, this could eventually mean higher approval rates for customers who previously fell into 'gray areas' of credit history. Lenders are currently weighing the benefits of 'bi-merge' reports (using two credit bureaus) versus the traditional 'tri-merge' (using all three). While bi-merge reports can lower the cost of originating a loan, they may miss critical data points that protect against default. If your financing partners shift to these new models, you might see changes in how quickly applications are processed and the fees associated with them. The goal is to balance the rising cost of credit data with the need to keep loans accessible for consumers. As competition for borrowers increases, expect your lending partners to experiment with these new scoring models to capture more market share without taking on excessive risk.

Source: American Banker — Top News

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