Credit scoring

The gateway to credit information

July 2007

You can never have too much information, so the saying goes. And with the three credit reference agencies (CRAs) acting as gatekeepers for most of the credit applications in the mortgage market, it's unsurprising mortgage lenders often have a combative take on relations with their providers.

But a lot has changed in just the last two to three years with the quality and breath of information opening up dramatically. The threat of increasingly complex identity fraud also continues to bind the credit industry and CRAs ever closer together.

Adding electoral roll information into the pot of available data is the latest innovation from the CRAs, and these innovations slash the amount of time needed to approve a mortgage.

“The availability of these details cuts down the amount of information you need from the mortgage applicant,” says Colin Dale, head of lending at Skipton Building Society. “We're well on the way to checking identity online because you can verify who you are dealing with. For every ten applications we can probably get matches back on seven or eight. When the system considers it has enough information and issues like the Know your Customer and money lending rules are satisfied we can cross-check and use retrospective data to speed up the processes. The difference for a lot of lenders now is that automated systems really have cut down on paperwork like retrieving bank statements which we used to have to produce manually.”

A report by the Competition Commission on home credit lending which reported last year also sang the praises of the services offered by the three UK agencies Experian, Equifax and CallCredit.

The report concluded that in practice CRA information both cut the cost of credit to consumers and made credit more available. In a statement, Experian said creditors using its positive data typically reduced bad debts by “approximately 50 per cent” while maintaining or increasing acceptance rates. Home credit lenders' practically non-existent credit sharing appeared to go hand in hand with higher default rates and uncompetitive interest rates. A quote from consumer champion Which? magazine was also included, suggesting that poor credit data-sharing was one of the chief culprits behind the UK's serial credit card borrowing crisis.

The truth is out there

But it seems no matter how hard the CRAs try, lenders will always want more from their credit information provider. Spiralling bad debt figures and the implications of responsible lending and 'Treating Customers Fairly' continue to put creditors under increasing pressure.

As a result, many lenders see flawless credit information as the key to solving many of their problems with several agreeing it was the only thing they wanted from their CRA.

Linda Will, managing director at Accord Mortgages, says rental default information would be a valuable indicator of any applicant's credit standing. The current creditor practice of asking landlords for references is unreliable, she says, because landlords are just keen to see off bad tenants.

Skipton's Dale says Inland Revenue data and driving licence information held by the DVLA would also be a useful addition to the data pot.

Mel Mitchley, director of industry relations at Call Credit, says despite substantial advances enabling lenders to share performance and current account data prompted by government and the media, there are still information gaps on certain sectors, including rental arrears, student loans, utilities and data from the council.

Equifax's external affairs director Neil Monroe says these gaps in local authority and utilities information are significant: “Where utility bills were such a small part of outgoings five years ago, they make up a bigger part of the picture now. The finance industry is making a huge effort, but what you are still missing is other parts of consumer finances which lenders still need to calculate affordability.”

Monopoly anyone?

Credit data is becoming a commodity, says Rob McQuade, director of credit at BM Solutions, who said a broader choice of credit reference agencies would be at the top of his wish list.

But the reason all the lenders cited for being with the credit information agency they are was that their lending scorecard, clearly central to all new business processing, was constructed around one provider's system based on information from its user group.

Chris Bull, operations director at Accord Mortgages, which uses Equifax, says Equifax is slightly more sophisticated at linking addresses than previously, but adds that fundamentally the information available to lenders hasn't evolved much in recent years.

“We've done a lot of analysis over the years, and the fact is it's swings and roundabouts in terms of who offers the best information between Equifax and Experian. We thought it was very good when Call Credit came along, to introduce more competition into the market and I think they're still gaining ground,” says Bull.

Mitchley disagreed that the CRAs all offered similar services. She said: “If that was completely true, Call Credit wouldn't be where it is now, would it?”

“Why would people have the discussion on the usefulness of multi-bureau data? Providers aren't prepared to be tied into one supplier,” says Mitchley.

Monroe says testing all three bureaux against each other's systems is something all mortgage lenders should be doing and says dual data-pulls are something lenders in the US have been doing for some time now. He also suspects CRAs aren't too far off providing the tools to provide dual bureaux capability.

Robert Ribiero, vice-president and managing director for international data analytics company Fair Isaac, says the US has been using multiple-bureau data for years and the benefits are clear: “Depending on which providers you are using, one is likely to have clear geographical coverage advantages over another, for example. Universally using multiple bureaux also adds a competitive edge to the market as lenders are taken out of the hands of a single provider and you can also switch providers more easily because the CRAs themselves start to offer that service.”

Soft and hard 'footprints'

Over 2006, the Financial Services Authority (FSA) began investigating how lenders dealt with the issue of hard and soft credit search footprints.
A spokesperson from the watchdog says it confirmed that hard footprints existed, but concluded that customers were not being adversely affected. The FSA said lenders look at a variety of information sources before they approve or turn down credit and felt the problem was not widespread.

“What we were looking for was not so much whether the footprints exist or not, but how lenders reacted to them,” said the FSA spokesperson. “But the most important thing we found was that consumers could still shop around.”

This issue is still a big concern to some mortgage lenders. “The vast majority of lenders are still leaving a hard footprint on consumer credit records, which is inconsistent with what the FSA was trying to achieve. This whole issue needs to be reviewed,” says Bull.

Dale suggests the intermediary market may be exacerbating the problems. “Mortgage regulation was intended to expand consumer choice and make it easier to shop around and add clarity to the process. As such, it's ridiculous that shopping around can still result in consumer detriment,” says Dale.

He adds the broker practice of sending multiple applications in on a consumer's behalf continues to raise concerns from lenders about the number of enquiries left on consumer accounts.

Rob McQuade, director of credit with BM Solutions, says bodies like the Steering Committee on Reciprocity (SCOR) or the Council of Mortgage Lenders (CML) should be taking a stronger lead on the issue.

“The consumer has the right to shop around without changing their credit score. Why isn't this the case with a mortgage application? You wouldn't expect this from any other sector of the credit industry.”

But McQuade admits that the problem has no easy solution yet and appears as frustrated by the lack of competition in the marketplace as he is irritated by the side effects. He says that once a lender is using one of the CRA's systems and has built scorecards and processes around this single information provider, simply changing provider is out of the question.

McQuade says building simpler application processing systems might be another solution but the cost of a complete system overhaul is cost prohibitive and likely to be holding lenders with systems coded to leave hard footprints back. He adds that running two systems is simply too expensive.

“CRAs are simply custodians of information and should never be able to influence strategy,” says McQuade.

The middleman

However, this could all be about to change. Chasing each other's heels to be first, two software providers are set to launch middleware software tools in the summer, which could make a multi-bureau approach more than just a talking point.

Software company DecisionMetrics, based in Hatfield, will announce the July rollout of a tool that can 'interface' with a lender's existing application processing tool and provide a link to all three CRA systems.

Creator Gary Scott agrees with McQuade that the obstacle stopping credit lenders using all three agencies is the fact that all credit systems are tailored to use just one CRA.

Called i-Bureau, the system acts as a translator, converting the diverse languages of all three systems into one standard language - the language or set of codes the lender is already using. The aim is for little disruption when moving from one system to another or adding another data source.

“Typically, a lender wouldn't want to use all three agencies because of the law of diminishing returns, but the system allows you to access a second bureau without the effort of having to do an entirely separate search,” says Scott. “This is also about resilience. If your primary service is down, you can switch to the second bureau.”

But he adds: “No-one wants to upset the credit bureaux. If you think about it, it will be good for them because the tool will generate more business. Although it is unfortunate that this first client won't just be adding another bureau but will actually be switching altogether, but we want clients to realise it is better to do two searches.”

Also primed for a July announcement, the other more established provider, Jaywing, already has three 'major financial services' clients signed up to use its software, Smartdecisions.

Andy Gardner, managing partner at Jaywing comments: “The bigger-picture approach means risk assessment can reach a new level of accuracy and will have a positive impact when it comes to the profitability of credit lending.”

Equifax's Monroe predicts this type of software will have “a huge impact over time”.

How fast lenders take it up will depend on individual lenders' systems and their cycles.

“For mortgage lenders bad debt ratios are still low so they have little reason to change. But when lenders review their scorecards, many will be looking at this. A dip in the property market could push uptake when lenders see bad debt levels rise, but at the moment there's probably less impetus to change,” says Monroe.

Victoria Hartley is a freelance journalist