Alternative Credit Reporting Resources:Examples From the Mortgage Industry

June 23rd, 2006Mark F. Catone, Senior Vice PresidentFirst American Credco

American Conference InstituteDelivering Financial Services to Underserved and Ethnic Markets

Where We Are Today Focus is on applicants with little or no credit history

– If everyone had an adequate credit history, we would not be here today– This is not the same population as sub-prime credit– The population of un-banked or under-banked is here to stay or it will grow

The addition of data to credit bureau files can only benefit – but must be kept up-to-date

Focusing on the specific problem Different Products Have Different Requirements Integrating “Alternative” credit data depends on several factors:

– Economics of the product– Flexibility dictated by a number of factors including:

Investor Requirements Regulatory Requirements Established Infrastructure Risk Management

Example: Distinct Product Segments

Credit Card

InstallmentLoan

Emerging Market

Alt-A

Prime

Sub-Prime

Mortgage

What Flexibility Related to Alternative Credit Do I Have?High Medium Low

Different Products = Different Economics & Risk Credit Card – Flexible; Example verified residential phone #

– Small initial exposure ($0 – balance transfers)– Authorization and blocking controls over each transaction and the line– Higher relative interest rates– Additional profits from merchandise sales (store card)– No collateral– Streamlined low cost origination process– Losses are expected to be larger than mortgage and many areas of installment lending Installment Loan – Somewhat flexible: Example: Co-sign– Medium to large balances– Often organized by collateral, i.e. auto, RV, boat and motorcycle– Captive finance companies have similar merchandise profit as store card– Linear origination process with relatively low costs in comparison to mortgage– Loss expectations depend upon collateral type and market segment Mortgage – Less flexible: Structured Underwriting, Investors – Large fixed amount– Highly regulated and heavily securitized– Fragmented and costly origination process taking several days to close– Losses are generally assumed to be very small, but volatility of loss is high due to size of the transactions and the low expectations

$1,500 – 25,000

$300 – 3,000

$125,000 - $400,000+

Operational Issues

Exception Based & Mortgage Specific Fully Verified

– All creditor data brought current– Validated

FCRA, Industry and Privacy Compliant Economical Consumer Focused Bridge from traditional no-FICO score “thin-file” to “no-file” and deliver “Alternative” score

Exception-based Alternative or Non-Traditional Credit Workflow

Mortgage Market Example: Don’t Let this Happen to You

For Release: January 17, 2006Credit Reporting Agency Settles FTC ChargesCompany Did Not Follow Reasonable Procedures To Assure Credit Report AccuracyConsumer reporting agency Far West Credit, Inc. will pay $120,000 to settle Federal Trade Commission charges that it did not follow reasonable procedures to assure the accuracy of the information in the consumer reports it sold to mortgage companies, in violation of federal law. Assistance in this matter was provided to the FTC by the Office of Inspector General, Office of Investigations, United States Department of Housing and Urban Development. “Keystone made mortgage loans based on the inaccurate consumer reports, and the mortgages

were insured by the Fair Housing Administration (FHA) of the U. S. Department of Housing and Urban Development. Some of the mortgages have defaulted, resulting in losses to the FHA program”

“The credit information provided by Keystone employees was not adequately verified by Far West, the FTC charges. In fact, documentation provided by Keystone for many of the consumers was false. For example, in many cases Keystone documented accounts with utility and cable companies that did not even service the areas where the consumers lived, according to the complain”.

http://www.ftc.gov/opa/2006/01/farwestcredit.htm

“No-FICO score “thin-file” to “no-file” and deliver “Alternative” ANTHEMscore

The addition of fully verified Non-Traditional data to thin file data with scoring addresses lenders risk management, validates risk models

Comparison to FICO Scores

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

<460 460 480 500 520 540 560 580 600 620 640 660 680 700 720 740 760 780 800

Lower Score Bound

Perce

nt of

Appli

cants

with S

core

AnthemFICO

Most records did not have a FICO score, but some lenders require both. Of the 2,304 records 1,079 or about 47% of them have a FICO score. An Anthem score was generated for 1,906 or about 83% of these records.

Thank YouContact Information:

Mark F. Catone12395 First American Way

Poway, Ca 92064mcatone@firstam.com

Ph: 619.938.7595

What Flexibility do I have: Alternative CreditHigh

Use any data, lenders discretionOK to skip traditional credit bureau checkExample: Residential phone number (verified) Any history

Size of Transaction = Risk$1,500 – 25,000$300 – 3,000 $125,000 - $400,000+

MediumSome discretion, Must check traditional credit bureau checkExample: Check traditional credit bureau files firstAny alternative data, lender discretion

LowMust Check Traditional Credit First + Most EconomicalSpecific Data, Specific Order IndicatedFully Verified or Brought CurrentExample:

– Three tiers, Rent, Utilities, Insurance Other– Thin file brought current– 12 month minimum history