Banks Extend Loans to Customers Without Credit Scores
Banks Test New Underwriting Methods
JPMorgan Chase (JPM), Wells Fargo (WFC), and US Bancorp (USB) are working with the US government to extend credit to consumers traditionally turned down by banks.
Under a pilot program which is scheduled to roll out later this year, the banks will consider a borrower’s checking and/or savings account balances and overdraft histories when underwriting loans. That is expected to increase the chances of approval.
The initiative is targeting individuals who do not have a credit score but are financially responsible. If the program is successful it would be a big shift in the methods banks use to underwrite loans, since credit score has long been the main tool to evaluate borrowers.
Millions Don’t Have a Credit Score
There are about 53 million US adults who do not have a traditional credit score. Most of these people use only cash and debit cards or are new to the country. If they need to borrow money, these people have limited options, which often means they face high interest rates.
Ten banks have agreed to be part of this government initiative. Through the program, banks will share data with each other when approving a loan. For example, JPMorgan will be able to approve an application for a credit card by looking at the applicant’s Wells Fargo checking account. JPMorgan is leading the charge, with plans to use deposit account data to approve credit card applications this fall.
JPMorgan Spearheads the Effort
For some time, banks have been making incremental changes to their underwriting processes to reach borrowers with little or no credit history. Several years ago, JPMorgan and Bank of America (BAC) developed risk models which use their own customers’ bank account activity to approve applications. That change led to 700,000 additional credit card customers at JPMorgan. Now, by sharing data, banks will have more information about customers—even if a certain customer does not have a history with a specific bank.
In addition to sharing data on savings and checking accounts, the banks are considering working with data aggregators such as Plaid and Finicity to access applicants’ history of paying rent and utilities. These initiatives could be a helpful way for banks to reach new customers and for people without credit scores to gain access to loans.
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