The standard approach to lending can alienate a large number of consumers from the housing market: 7% of U.S. households (nine million) were unbanked, and an additional 19.9% of U.S. households (24.5 million) were underbanked, according to an FDIC National Survey in 2015. In fact, there are approximately 40 million U.S. consumers who either have thin or no files with a credit bureau. Many of these individuals are unbanked or underbanked and may have turned to non-bank loans because of their thin files. In a recent study by LexisNexis Risk Solutions, 68% of institutions viewed providing financial services to this demographic as very important.

Consumers with little or no credit history are not inherently "bad" – in many cases, they might prove to be more financially responsible. Millennials, for instance, make up a portion of those with "thin file" credit histories – and as young adults, many of these consumers are on the cusp of home ownership. Credit unions are uniquely positioned to offer mortgages to this underserved portion of the market, without adding risk.

Alternative Data Fills the Void

Alternative data is a valuable source of information on those consumers with thin files, as well as the vast majority of unbanked and underbanked individuals in the U.S.; LexisNexis Risk Solutions has information on 98% of all U.S. adults. Rather than rely solely on a person's previous credit history, alternative data views the person's financial behavior through a broader spectrum, one which necessarily supplements credit bureau data.

With alternative data, lenders can use performance validated attributes and scores to have a better view of a consumer's creditworthiness. When evaluating someone who also has a FICO score, lenders will then have a stronger perspective in credit risk decisioning. In fact, lenders who use alternative data-based solutions have confirmed they can originate quality, performing loans to consumers who, even while having a lower FICO score and/or a thin file, appear more creditworthy when factoring their alternative data. Lenders have also reported having quality results in leveraging alternative data-based tools to originate loans to consumers without a traditional credit profile – "no-file consumers" – those who would otherwise be cut off from most financial services. Ultimately, alternative data-based lending tools provide credit unions an enhanced view to make responsible credit risk decisions about a consumer that goes beyond their FICO credit score.

A New Share of the Mortgage Industry

Consumers with thin file credit histories or even some no-file consumers represent a valuable opportunity for credit unions looking to remain competitive against larger financial institutions. In many cases, these consumers are creditworthy individuals who are being passed over by banks due to investor eligibility requirements. But by adopting alternative data into their credit risk decisioning processes, credit unions can offer mortgages to these consumers, without exposing their business to greater risk and more fully serving their community. And by increasing their market share in the mortgage space, more thin-file consumers, such as millennials, will gain access to these financial products – and ultimately, a home of their own.

Tim Coyle is Senior Director, Real Estate & Mortgage for LexisNexis Risk Solutions. He can be reached at [email protected].