The use of new data to determine prospective buyers’ creditworthiness will increase opportunities for homeownership among Black and Latino Americans, according to new research outlined at a virtual event this week hosted by the National Association of Realtors.
Tipping the SCALE: How Alternative Data in Credit Scoring Promote or Impede Fair Lending Goals examines how reforms to credit bureau data and scoring models, which exclude many common household expenditures like rent and utility payments, would provide a more comprehensive view of a household’s credit performance and dramatically increase opportunities for property ownership.
The paper’s authors, Dr. Ann B. Schnare and Professor Vanessa Gail Perry, propose a five-point plan to evaluate data under the coined “SCALE” model:
- Societal Values: Does it respect social and ethical norms like right to privacy
- Contextual Integrity: Regardless of predictive value, is it relevant to mortgages
- Accuracy: Does the data accurately reflect the household’s financial situation
- Legality: Would the use of the data have a disparate impact on protected classes
- Expanded Opportunity: Would the use of the data increase the number of qualified borrowers
“Minorities are far more likely to be ‘unscoreable’ or have relatively weak credit scores using traditional credit bureau data,” Schnare said during NAR’s virtual event announcing the proposal. “Incorporating additional data into the credit evaluation process can open doors for many deserving borrowers and boost minority homeownership rates.”
NAR points out that homeownership rates for Black and Latino Americans have lagged for decades, highlighting the need to review existing tools and identify new credit valuation processes.
“A borrower’s credit report and credit score are the gateway to a mortgage,” said NAR President Charlie Oppler. “But for too long, inaccurate credit reporting methods have raised the cost to borrow while limiting access to mortgage credit for prospective borrowers, particularly those from minority populations and rural communities. NAR is eager to apply this new research to help shape our policy positions and advocacy efforts in the future.”