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Policy & Economic Research Council
By Patrick Walker
NCRA’s 2009 National Conference November 13th, 2009
Alternative Data Initiative Furnishing, Integrating, and Using Utility and Telecom Payment Information
2
About PERC
Founded in 2002
Non-partisan, non-profit policy institute devoted to research, public education, and outreach on public and economic policy matters
Dedicated to finding sustainable information- and market-based solutions for development challenges worldwide
3
Supporters of Alternative Data Initiative
Acxiom Corporation Ashoka Foundation Bank of America Brookings Institution CFED CFSI Consumer Data Industry
Association Equifax
Experian GE Money Hispanic National
Mortgage Association HSBC JPMorgan Chase Lexis Nexis SAS Institute Trans Union LLC
4
Access to credit crucial for asset formation (homes and small businesses) and information for risk assessment is needed to access credit
Why Care? (Consumer) 35 to 54 million Americans “unscorable” Primarily low income, immigrants, elderly, and ethnic minorities
Why Care? (Commercial) 90% of businesses are small 12.5% fail within 3 years often for reasons of credit access. Black and Latino owners face greater loan denial rates (SBA)
The Need for Alternative Data
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Credit Crisis and Crunch Stricter lending guidelines and underwriting standards
By lenders By regulators
Reg. Z Greater need for solid evidence and measures of credit risk
and capacity Reduction of credit extended
Bank analyst estimates a reduction of $2.7 Trillion on cards alone by end of 2010
Stricter information needs for mortgage lending Consumers without credit risk and capacity information
excluded from lower cost mainstream financial services
The Need for Alternative Data
6
We identified and tested alternative data (energy and telecoms) as solution to risk assessment and credit access: ADI I showed that, in principle:
o mainstream lenders interested in using data to reach underservedo bureaus and data repositories were interested in collecting alt-datao furnishers had interest and were curious about reporting
But, chicken vs egg:o lenders not demanding alt data because it was absento data agencies not collecting because not demanded
ADI II designed to show how to move togethero lenders, furnisher, and foundations came together to testo Impact analysis to see who benefits
ADI III showed furnishers costs and benefits of reportingo Survey of utilities, telecoms, and other typical non-reporterso Survey of customerso Furnisher case studies
ADI IV begins major outreach based on learnings from ADI I,II, & III
Alt Data’s Problem and Its Promise for Asset Formation
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Alternative Data Initiative,Phase 1
What Data Can Make a
Difference?
Released December 2006Freely Available:
www.perc.net
Qualitative Research
QuickTime™ and aTIFF (LZW) decompressor
are needed to see this picture.
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Assessed usefulness along 3 key dimensions
“Cash-like” vs. “Credit-like” (incentive to furnish)
Coverage (reach of data in population)
Concentration (resources needed to reach furnishers)
Why Utilities and Telecoms?
Traditional “credit-like” data
Non-traditional “cash-like” data
Energy
Water
Cable
Auto liabilityinsurance
Tuition
RentalPayments
Child care
Payment cards
Payday loans
Con
sum
ers
Util
izin
g S
ervi
ces
Concentration of Data Furnisher
HighLow
Man
yF
ew
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Technological barriers to reporting: Complex billing cycles (footprint dependent) Legacy IT systems
Economic barriers: Compliance costs—FCRA data furnisher obligations Customer service costs from lenders scaring customers
substantial
Regulatory barriers: Three states have statutory prohibitions (CA, NJ, OH) Federal prohibitions: Section 22 of the 1996
Telecommunications Act Regulatory uncertainty at the state level
Barriers to Reporting
10
Alternative Data Initiative,Phase 2
How Much of a Difference Can the Data Make?
Released December 2006Freely Available:
www.perc.net
Quantitative Research
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Risk profile shows promise Score distribution of thin-file sample similar to
general population Nearly 40% of Black unscoreables have scores
above 620 when energy or telecoms data added
10% of unscoreable now scoreable and thereby able to access credit 1 tradeline matters Multiple tradelines are better
Key Findings: Expanded Access &No and Thin File Not High Risk
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Key Findings--Greater Access for All
Considerable increases in acceptance rates for a given performance level. For utilities, an increase of 6 percentage points for a 6% delinquency level.
Acceptance Rates by Targeted Delinquency Rates
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Key Findings--Greater Observed Access
Access is not merely hypothetical but seen in the share of the thin-file population for which alt data is reported.
(“Validation sample” = no alt data)
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Key Findings: Increased Access for Underprivileged Social Segments
Considerable lift for Blacks and Hispanics, Low-Income
Change in Acceptance Rates at 3% Delinquency Target by
0%
5%
10%
15%
20%
25%
All Asian Black Hispanic Other White
Utilities Telecoms
0%
5%
10%
15%
20%
25%
30%
<$20,000 $20,000-$29,999 $30,000-$49,999 $50,000-$99,999 $100,000+
Utilities Telecoms
Race/Ethnicity Income
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Market Outcomes To Date
Chicken v. Egg Solved: Created Demand Lenders now testing and using alternative data for
underwriting credit Bureaus and CRAs now collecting more alternative data Analytics firms creating more scoring models
SYSTEMIC CHANGE--Pervasive reporting of alternative data could change the way banking
is done in under-served markets.
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Alternative Data Initiative, Phase 2-3:
Can Alternative Data Harm
Consumers?
Released July 2008
Freely Available: www.perc.net
Quantitative ResearchFollow-up
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Contra fear that alt data harms: No evidence of credit score deterioration over time
when alt data is included No evidence of alt-data scoreables becoming over-
extended and having declines in credit scores.
Evidence suggests that reporting payment data serves both as a consumer protection and a system wide protection.
Key Findings:Answering Follow-up Questions
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Original Finding: Little Effect on Scores
Change in Credit Score with the Addition of Utility Payment Data (Statics from March 2005)
But finding is based on static information
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Key Findings: Picture Remains Over Time
Changes in Score for Consumers with Alternative Data Over a 1-year Period, by Number of Trade Lines (from March 2005 to March 2006)
Scores increased for consumers by a larger degree than they decreased over the year-long period
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Key Findings: Scores Go Up Over Time with New Accounts
Average Scores Increase with the Age of the Financial Account, for all and for all racial segments
March 2006 Vantage Score for Alt-Data Holders with Financial Accounts, by Age of Account
Group I New Account less
than a year old
Group II New Account 1-3
years old
Group III Alternative and 1
Traditional account over 3 years old
Average 613 637 660
Ethnicity
Asian 664 689 677
Black 573 587 602
Hispanic 627 643 628
Other 640 668 699
White 611 635 674
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Key Findings: Scores Go Up Over Time with New Accounts
Average Scores Increase with the Age of the Financial Account, for all and for income segments
March 2006 Vantage Score for Alt-Data Holders with Financial Accounts, by Age of Account
Group I New Account less
than a year old
Group II New Account 1-3
years old
Group III Alternative and 1
Traditional account over 3 years old
Average 613 637 660
Income (000) $
<20 596 628 649 20-29 608 637 668 30-49 620 649 676 50-99 642 666 698 >99 697 695 732
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You Score, You WinThe Consequences Of Giving Credit
Where Credit Is Due
Policy Concerns and Considerations
Quantitative Research Follow-up
23
In wake of mortgage crisis, draft FHA Modernization Act of 2007 § 257 (a):
“[P]ilot program to establish an automated process for providing alternative credit rating information for residences to be insured under this title who have insufficient credit histories for determining their creditworthiness.”
Alternative credit information may include: rent, utilities, and insurance payment histories, “and such other information as the Secretary considers
appropriate”
Proposed projects such as these to salvage homeownership can greatly benefit from opening the alt data tap
Near Term and Future Promise:What’s At Stake in Policy Questions
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Identified first in ADI I, but feedback shows a consistent lessons: Where statutory barriers exist (direct and
indirect) must be removedo States: CA (telecom), OH (publicly owned), NJ
o Federal: Section 222 of the Telecommunications Act of 1996
Regulatory uncertaintyo More pervasive
o Requires public affirmations
Policy Change and Policy Clarity:Answering Follow-up Questions
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Lessons from elsewhere: Retirement programs
o Opt-out systems have initial enrollment rate of 90% rising to 98% vs.
o Opt-in systems which have enrollments of 20% rising to 65% Organ donation: European countries where opt-out of
organ donor have higher rates than where citizen opts-ino Austria (opt-out) has 99.9% rate v. Germany (opt-in) which has
12% rateo Sweden (opt-out) has 86% rate v. Denmark (opt-in) which has
4.3%o France (opt-out) has 99.9% rate v. U.K. (opt-in) which has 17.2%
rate
Default Settings Matter
Policy Options:Opt-In v. Opt-Out
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Alternative Data Initiative, Phase 3
Will the Data be Reported? Is there a
business case?
Released March 2009
Freely Available: www.infopolicy.org
Research on the Supply Side
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ADI: Phase 3
Utility and Telecom survey Average firm benefits of fully reporting are several
times the costs Benefits include fewer delinquencies, decline in
accounts in arrears, and improved cash-flow Costs include IT upgrades, conducting new
processes, and new customer service demands All firms reported benefits > costs 10% of firms in survey currently fully report to a
bureau 89% currently refer delinquencies to a collections
agency
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ADI: Phase 3
Customer Survey Half of customers surveyed would be more likely to
prioritize a utility or telecom payment if they knew it was fully reported
No income or ethnic group appears to be more informed as to which payments are fully reported and which are not No evidence that any of the subgroups
disproportionately use the fact that some payments are not fully reported to ease cash-flow problems
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ADI: Phase 3
Case Studies of firms that fully report: The DTE Case
DTE Energy Serves over 3.5 million customers Includes Detroit Edison (electric) and MichCon
(natural gas) August 2006 began fully reporting to credit
bureaus
8.1% of DTE’s customers either gained a credit file or a credit score due to DTE’s decision to fully report customer payment data
Most customers that were scoreable prior to August 2006 had little or no change in their credit score when the DTE tradeline was added
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Alternative Data Initiative, Taking Care of the Supply Side:
Inducing Reporting
ADI: Phase 4
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ADI: Phase 4
Policymaker and Government Track Respond to questions and concerns from lawmakers,
regulators, and media Federal level State level
PUCs, NARUC NCSL, NGA, NAAG
Furnisher Education & Outreach Exhort full reporting Strategic events (USTA, RMA, EEI, AGA, CTIA) Stand alone events
Policy & Economic Research Council
100 Europa Drive, Suite 403
Chapel Hill, NC 27517
www.perc.net
Phone: (919) 338-2798
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