More Data, Less Risk
LexisNexis has introduced a new element into credit risk management: the use of alternative data sources to improve traditional underwriting processes.
“We have much broader coverage of the population than the three bureaus,” says Grayson Clarke, the company’s senior director of credit risk decisioning. “We start with bureau heading information and build upon it with our thousands of sources. We build an individual’s profile through data such as property ownership and value, professional licenses, educational data, estimated income, and derogatory records.
“We use all of that data to build scores that either supplement what credit bureaus generate or are used on a standalone basis where limited or no bureau information is present.”
Until recently, says Clarke, LexisNexis’ Credit Risk business focused on top-tier banks. “Now that several top banks have adopted our data, we’re shifting focus to credit unions because of their desire to increase lending by supplementing their own strict credit criteria with our data.”
Clarke says credit unions have a higher burden of proof for creditworthiness, which supplementary data helps them satisfy. “We take data from random studies of millions of consumers at the time they’ve applied for credit cards, then match it against credit bureau data, our data, and subsequent performance.
“We build a custom model based on bureau data, then build a second model that uses both bureau and LexisNexis data,” he adds. “When a credit union compares the two, it sees that we have created a very defensible analysis of credit risks.”
Clarke says there are 40 million “no file” adults in the U.S.—people lenders don’t see or don’t consider eligible for credit cards. “Using our criteria, we can produce a defensible credit score on 50% of them. We can also identify the 40% of the no-file population that has a high-risk rate. This tool allows credit unions to look at prospects they might not have considered before.”
The “thin and no file” population will continue to grow, says Clarke. “If credit unions can find a way to score it and offer credit to its best risks, they can be the first to establish relationships that could last a lifetime.”