FHA Encourages Lenders to Use Bill Payment Data for Loans

On April 29th, FHA issued a letter stating that it would prefer all nontraditional credit references be verified by a "credit bureau." It also specifically said that credit histories can be developed using a "bill payment history, as well as a score" based on rental, utility, and other "common recurring non-reporting bill payments." The letter also provided industry guidance on how to create bill payment histories so that the data is reliable for main-stream use in credit scoring and underwriting decisions. To read FHA Mortgagee Letter 2008-11, visit: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/08-11ml.doc

PRBC verifies rental and other regular bill payment information to create credit files and scores for borrowers. PRBC verifies all of the acceptable payment types described in FHA's guidance letter: Group I payment types (rental housing payments, gas, electricity, water, telephone, and cable) and Group II payment types (insurance, daycare, internet, cell phone, and retail store obligations).

The verified payment data is provided in an FHA-approved credit report - PRBC Report. Currently PRBC is the only credit bureau that offers a predictive bill payment and nontraditional credit references report and score - known as the PRBC Report with FICO Expansion Score. The score uses the same 300-850 range as the classic FICO, and has similar risk ordering predictive power. PRBC enables loan originators to build a credit report for their borrowers using basic payment account information for regular bills that typically aren't reported to other bureaus. Originators enter their client's payment account information on PRBC's online web form (http://www.prbc.com/partners/brokers.php). PRBC Verifications can be completed in as little as 24 hours, and are delivered in a comprehensive FCRA/FACTA-compliant PRBC Reportsm with FICO® Expansion® Score.

"Data quality has been FHA's and other investors' main concern regarding bill payment verification," said Michael Nathans, Chairman and Founder of PRBC. "If the verification is done by an interested party - for example, someone who earns a fee on a closed or sold loan - there is always the potential for fraud to creep into the process. While FHA has accepted bill payment data for some time, the new guidelines give the industry both a framework and the confidence to reach out to borrowers with little or no traditional credit history. FHA's encouragement of the use of bill payment histories, properly verified by a credit bureau along with a score, is very timely in light of the need to restructure and modify subprime mortgage loans. Many of these borrowers have a record of on-time bill payments that is unreported to traditional credit bureaus and is therefore unscorable.

"PRBC applauds the FHA for its leadership in making on-time rental, private mortgage, manufactured home, insurance, utilities, and regular bill payments count in credit scoring because the FHA's move paves the way to use this same bill payment history and score for auto, personal and credit card lending, all of which typically precede a consumer applying for a mortgage loan," he added.

Recently, PRBC and the National Credit Reporting Association (NCRA), a national industry trade association, announced new protocols for manually verifying a credit applicant's identity, rental and regular bill payment account histories for inclusion in PRBC Reports with FICO Expansion Score. The NCRA also established a Data Quality Standards Committee to independently audit the quality of verifications that NCRA members perform using PRBC's protocols and secure Verifier Interfaces.

NCRA executive director Terry Clemans stated, "We are very pleased to see the FHA and others providing stricter guidance surrounding the use of alternative credit. NCRA members have historically provided reports using alternative credit data and have fully supported PRBC's directive to create a national repository and standard, increasing the data quality for lender and secondary market acceptance. To maintain a cutting edge position in this process, we have created the Data Quality Standards Committee to work closely with PRBC to ensure that the bill payment history reports being utilized meet the highest standards of data quality available from any source of credit information, which can also be scored."

To learn more about using PRBC Reports with FICO Expansion Score to close FHA-insured mortgage loans, visit http://www.prbc.com/partners/default.php.