Published by Kartik Subramaniam
As the lending industry evolves, changes are made to credit reporting. The newest of these changes is the emergence of a concept known as “trended credit data”. Equifax, one of the three major credit bureaus, has called it “the most important tool developed by the credit reporting agencies since the advent of the credit score” (CAMP source). Fannie Mae will be implementing trended data (TD) into its Desktop Underwriter risk assessment and automated loan underwriting software on September 24th, with the launch of DU 10.0.
Currently credit scores provide a picture of consumer behavior at a moment in time—a snapshot of sorts—and do not necessarily demonstrate how a borrower has managed credit over a period of time. The trended credit data provides information over time, attempting to more thoroughly tell the story behind a credit score. There are many questions and concerns with this new system, so we have tried to address many of them here.
How does trended credit data work?
Trended data will typically go back 24 months. Right now trended data just means data on the use, balance, and payment history of revolving credit cards. Other information will likely eventually be incorporated and examined over time, but for now it is essentially an examination of credit utilization and actual payment amounts on these accounts.
What exactly does this mean? With trended data, a viewer of a report will be able to view the way someone manages their credit card accounts in aggregate. Has their balance been slowly decreasing? Do they always pay off their card in full at the end of the month? Does the cardholder spend more seasonally (think summer vacations and holiday shopping)? What does their credit utilization rate (CUR) typically look like?
This information is very useful for two groups of hypothetical loan applicants. First, consider three applicants for a loan. They all have the same credit score—720. Just looking at that number, it would be difficult to determine any difference in risk in lending (if other traditional factors like down payment and income are appropriate for their application). But logically we know those people could have different levels of risk (debt, late or missed payments, etc.). Now let’s say trended data shows us that one of those applicants has an increasing aggregate balance across their cards, one has stayed roughly even and is making payments, and the other is demonstrably lowering aggregate credit card debt over time. Obviously the applicant with rising debt is more risky than the others. Along the same line of thought, the applicant lowering debt is likely the safest—they already have a good credit score, but are following debt management practices that suggest that in the future their score would be even better.
The other group of hypotheticals is the applicant that has good credit, a good application, but shows a high credit utilization rate. This means that their aggregate credit card debt is near their overall credit limit. This is a factor that can lower credit scores and is typically a red flag for approving an application (in the event the credit score is still in an acceptable range). Trended data can show how this debt has been accumulating and what the applicant’s debt management usually looks like. If the applicant is a seasonal credit utilizer that always pays off the debt the next month, then there is far less concern. In this case trended data may help someone get approved that normally would not have at that time.
DU 10.0 will allow underwriting for borrowers without credit scores. Currently this requires manual underwriting, and manual underwriting for these people will continue in some cases. To underwrite, a three-in-file merged credit report and evidence of at least 2 trade lines that stretch back at least 12 months will be required. One of these trade lines must be housing (rent payments), but the other can be anything, such as payments on a cell phone bill. There are more hoops to jump through as far as qualifications (proof of income, bank statements, loan-to-value ratio limits, etc.), but any applicant with no credit score should not expect a traditional process.
What does this mean for consumers trying to qualify for a mortgage?
Applicants with good scores but increasing aggregate balances across their cards are going to have more problems qualifying for loans than they did in the past. Upward trends in this debt indicate measurable, substantial increase in risk. According to the California Association of Mortgage Professionals (via TransUnion), these borrowers are 33-55% riskier (CAMP source) than similar borrowers who pay off their accounts in full every month.
People with decreasing aggregate balances on credit cards are going to fare better in the application process than in the past. These people are considered relatively lower risk and the process of trended credit will help these borrowers prove creditworthiness.
Under this system it is likely that rapid credit fixes (like paying off a credit card) will have an impact on score and likelihood of receiving a loan, albeit a smaller impact than before due to the fact that trended data will be able to determine overall riskiness of debt management, not just focusing on one or two good recent decisions.
While Fannie Mae is changing the way it looks at credit and underwriting, it does not actually anticipate a substantial change in the percentage of approvals. Through better risk assessment they anticipate more accurate approval, but this does not necessarily mean that the number of qualified applicants is lower. It just means that the number of those who would have been approved in the past, but will not now, is roughly equal to the number that would not have been approved in the past, but will now.
Who is NOT Affected by TD?
Other popular sources will not yet be impacted by TD. Freddie Mac will not (yet) be using trended data. FHA and VA applications to DU will not be impacted yet by trended data either. It is quite possible that these programs will all be impacted by TD soon, but at least for now TD is just relevant to Fannie Mae products.
FICO credit scores and VantageScores will also not include trended data in their calculation.
There will also be the same vehicle for borrowers to dispute data as currently exists. Likewise, Adverse Actions and the required disclosures will also be the same.