alternative data credit

ALTERNATIVE DATA FOR CREDIT UNION LENDING DECISIONS

The defi Team Business Process Outsourcing, Credit Unions, defi INSIGHT, Servicing Systems

alternative data credit

 

Experian reports that at least 65% of lenders use alternative data to make lending decisions, and this number is expected to grow further over the next few years. It’s easy to see why this type of data is becoming so popular—with alternative data, credit unions can make more informed decisions that result in better terms for more members, particularly those whose credit scores are worryingly low or who don’t have an extensive credit history. Experian estimates that more than 100 million people may be ineligible for loans because they have no traditional credit history. 

 

This is creating a huge opportunity for credit unions to step in and offer their services to potential new members. Using alternative data, credit unions can more fairly assess applicants—even those who might never held a credit card or who have just opened a new account. By providing loans to these members, credit unions can corner a market that some other lenders neglect.

 

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Why is Alternative Credit Data So Important?

Alternative data differs from traditional credit bureau-provided data in that it isn’t based on credit scores, bankruptcy records, lines of credit, loan or mortgage history, or other tradelines. Instead, alternative data is a much broader category that can include virtually any type of data that falls outside of traditional credit scoring systems, including: 

 

  • Rent or utility payments; 
  • Information in the public record;
  • Borrower assets; 
  • Driving, employment, and income history;
  • And many more. 

Traditional credit data may give you an incomplete snapshot of a members’s history and your credit union’s lending risk. It can also point you in the wrong direction. For example, a subprime borrower may appear too risky if you only look at the traditional credit data.

 

With alternative data, credit unions can more reliably suss out which borrowers are trustworthy or which are trustworthy but have been negatively affected by events outside of their direct control. Alternative data is also an excellent supplement to a traditional credit assessment. Combining traditional and alternative data gives you a much more detailed view of a member’s history and allows you to make better lending decisions.

5 Ways to Use Alternative Data for Credit Union Decisioning 

Because alternative credit data is so broad in scope and far-ranging in possible uses, its impact on credit union lending decisions varies. For some credit unions, alternative data could help open new revenue sources. For others, alternative data may just make their traditional data collection methods more comprehensive. Information is powerful in the lending industry, so the more data you have, the better your decisions will ultimately be. Here are five notable ways that alternative data helps credit unions make wiser choices:

1. Reduce Delinquency and Lower Default Rates

A credit score may only tell you part of the story. It’s possible for a borrower to have a decent credit score and still be a delinquency risk. Alternative data can help you significantly reduce the risk. When you look at a member’s’s entire history, it’s easier to spot potential red flags before you approve the application. Preventing delinquencies in the first place is always preferable to recovering delinquent accounts.

2. Find New Lending Opportunities

When used properly, alternative data empowers credit unions to expand their portfolios without significantly increasing risk. Your institution can begin accepting loan applications from young adults who don’t yet have a long credit history but who responsibly pay their utility bills or rent on time. If you can see their income history, driving records, or other relevant information, you can get a good sense of how reliable the borrower is, even if the member has no or little credit history to speak of.

3. Take a Closer Look at Denied Applications

If an application is denied, you can run it through your decisioning rules again, this time with alternative data in mind. Sometimes applicants who are denied based on traditional data can be approved when lenders have all the information in front of them, including relevant alternative data. This ensures that the honest and trustworthy won’t fall through the cracks. Some credit unions use alternative data as a failsafe to give every member a fair shot at getting approved for a loan.

4. Automate the Decisioning Process

One of the main benefits of traditional credit data is that it’s often simple to analyze and configure rules around. You can automatically deny any applicant with a credit score below (e.g.) 600. Alternative data can also be automated into a credit union’s existing loan decisioning system. Although there’s no simple score to reference, when you use modern loan origination software (LOS) and other automated decisioning tools, you can make decisions based on alternative data in moments. You just decide what type of data to collect, how to qualify or quantify it, and which rules apply to that data. Then it’s a matter of collecting data and applying those decisioning rules to their applications.

5. Create More Precise Decisioning Rules

Alternative data empowers credit unions to think outside of the box with their decisioning rules. Rather than being limited to a small set of rules, you can make your own rules based on very specific types of alternative data. Even seemingly minor details could help you predict credit behavior. Some financial institutions track whether the applicant changes any information as they fill out their applications online, such as their estimated income, most recent address, or contact information. This type of data was once too time-consuming for credit unions to track, but with automated tools and decisioning rules, it’s possible to analyze applicants even at this detailed level.

 

With alternative data, credit unions have far more information on which to base their decisions, whether they’re sorting through new applications or structuring loans for target demographics.

How to Incorporate Alternative Data into Your System

Although alternative data can be a boon for credit unions, it’s also important to approach it with care. Credit unions still have to ensure that they’re compliant with all fair lending and credit regulations that protect members. 

 

This is why it’s important to partner with an alternative data collections expert. The best LOS vendors include both traditional and alternative data in the loan decisioning or origination process. These experts incorporate custom decisioning rules into the system, and check that these rules follow current regulatory guidelines for fair lending practices. They can also automate many of these decisions, which reduces human error and overall lending risk. With their help, your credit union will make loan decisions backed by data and careful risk calculations instead of instinct or incomplete information.

 

There are potentially millions of trustworthy borrowers out there looking for loans who don’t have the credit scores or loan history needed to obtain them. Alternative data lets your credit union give these potential new members a chance to prove their creditworthiness.

 

Getting Started

defi SOLUTIONS is an LOS vendor that has a depth of experience with alternative credit data. We work closely with credit unions to identify possible sources for alternative credit data and create configurable decisioning rules based on this data. To improve your decision-making power, contact our team today or register for a demo.

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