If knowledge is power, lenders are becoming more powerful.
Recognizing that a prospective borrower's payment history is just the beginning, the three major credit bureaus are widening the types of personal data they can provide banks, in an effort to strengthen financial firms' ability to properly assess loan candidates.
Borrowers' income and assets are "going to be more of an indication of their ability to repay than just the credit report," said A.R. Smith, the president of American Home Bank in Mountville, Pa., a division of First National Bank of Chester County.
The dubious marketing and underwriting processes of the past decade largely overlooked borrowers' capacity to pay and their capital — two of the textbook "three C's of credit." Traditionally, credit reports and scores only reflected the third C: character.
Today, with lenders' renewed focus on conservative underwriting and desire to resume more robust marketing efforts, especially of credit cards, the bureaus are revamping their data offerings. Equifax, Experian and TransUnion, along with score provider Fair Isaac Corp., are creating services that give lenders a more holistic view of the customer, including how much money a consumer makes and how much he or she is worth.
"We're just in a transition period right now where banks are trying to increase consumer confidence and credit bureaus are trying to re-establish the credibility of the scoring systems that they have," said Ted Landis, a senior executive at Accenture who leads the consulting firm's payments practice in North America.
Though income and asset data are useful in a variety of applications, from underwriting to collections, lenders are particularly interested in using such information in the marketing process.
With the economy improving, there is a greater desire among lenders, especially credit card providers, to identify new clients, said Fair Isaac's chief executive, Mark Greene.
"Acquisition spending is up, and acquisition campaigns are rolling out as we speak," he said. "The question is to whom should those new marketing initiatives be sent?"
Opportunities exist in the high and low ends of the credit score spectrum, Greene said. The challenge is distinguishing which borrowers in each segment can take on more credit. "Two individuals with the same score might have a different capacity to take on more debt," he said.
Last summer, Fair Isaac introduced its Credit Capacity Index, a proprietary model that uses Equifax credit data to help lenders better predict which borrowers would be able to take on more debt and still pay their bills on time. "It says that not only is this a high-creditworthy individual, but here's how much credit they can absorb without changing their credit score," Greene said.
Equifax has spent about $1.6 billion over the past three years, mostly through acquisitions, to augment its data.
In May 2007, the company bought Talx Corp., a St. Louis provider of employment verification and payroll services, in a deal valued at $1.4 billion.
And in October of last year, Equifax purchased IXI Corp. for $124 million in cash. The acquisition of the McLean, Va., company, gave Equifax a database of consumer investment and asset information from more than 95 banks, brokerages and other financial firms, representing more than 42% of all consumer invested assets in the U.S.
Currently, about 100 of the largest banks and brokerages submit anonymous wealth information to the IXI database, Equifax said. That data is aggregated by ZIP code to give lenders a picture of average household wealth in a particular area.
"No longer can they just carpet bomb … households," said Dann Adams, the president of Equifax's consumer information solutions business. "They need better segmentation tools."
While segmenting borrowers based on geographic location might raise questions of redlining, Equifax vice president of product management John Cullerton said that the IXI ZIP code-based asset information cannot be used as a factor in credit eligibility decisions.
To address privacy concerns, employers obtain their workers' permission before providing income information to Talx. Likewise, lenders need written permission from prospective borrowers to access Equifax's income data.
When Equifax bought Talx three years ago, the company had about 30 million employment records in its database. Today, there are nearly 50 million.
Equifax has also built models using the income data so that estimates can be given for individuals who are not in the database.
Experian launched its own set of income tools last November. Income Insight was developed using a database of verified income that was acquired from a strategic partner. The income data encompasses many sources, including wages, investments, alimony and rent, Experian said. (The bureau would not identify the partner, citing competitive reasons.)
That data was then matched against Experian's credit reports to determine which attributes in the reports were the most predictive of income and a model was created off of this information.
Income Insight provides lenders an estimate, rounded to the nearest thousand, of an individual's income based on his or her credit report. The model can be applied to nearly any individual for which the bureau has a report.
A separate service, called Income View, is a Web-based tool that enables lenders to access verified income information from the Internal Revenue Service (IRS).
Because the income services are fairly new, Experian was not able to give hard numbers on how many clients have adopted them.
Laura DeSoto, Experian's senior vice president of strategic initiatives on credit businesses in the U.S., would only say that the interest level "has been very high." (Some of the top credit card lenders, including American Express Co., Citigroup and JPMorgan Chase, declined to comment for this story.)
Incorporating income and asset information has not been easy, and it's by no means a completed task. There are regulatory issues to consider as well as the scope and timeliness of the information.
"From an income perspective, there are significant challenges," said Ezra Becker, director of consulting and strategy in the financial services business unit at TransUnion.
"The major payroll processors might have data available, but they don't have data available for people who are self-employed, for retirees, or [those] employed by smaller institutions," he said. "A mom-and-pop shop doesn't have their payroll done by ADP."
What's more, income information from the Social Security Administration or the IRS may be outdated by the time it's requested.
"Just because somebody reported an income for 2009, doesn't mean they are still employed making that income in March of 2010," Becker said.
Still, there is value in offering lenders a benchmark they can use to determine the types of products to offer a prospective borrower, he said.
Several years ago, TransUnion developed a proprietary add-on service that estimates an individual's income using their debt profile and credit usage.
That model has gone through several updates, said spokesman Clifton O'Neal. The most recent one, in 2008, uses "a fresher, more current development sample," he said.
The income estimator is "generally not used for adverse actionable decisioning," Becker said. "You're not going to reject a consumer because of an income estimate." Instead, this type of data can give guidance on what credit limit to offer a certain individual, he said.
Still, the credit bureaus' push to provide income and asset data has raised red flags among some consumer advocates.
"There's something about credit bureaus knowing your income, knowing your assets that seems to be going too far, particularly since both of those things change frequently," said Edgar Dworsky, a former Massachusetts assistant attorney general and a former member of Experian's consumer advisory board. "I just think it's fraught with peril, because it's not static."
He also questioned whether the models could be used detrimentally against a consumer.
"I don't live in a particularly wealthy area, but I do have some assets," he said. "If you generalize that in this ZIP code, the general asset is so-and-so, I might not fit the average. I might not get credit because I'm not average. … I find that troubling."
TransUnion's Becker recognizes the limitations of the data, but said the responsibility ultimately lies with lenders to determine its usefulness.
"An effective lending strategy is always about balance," he said. "While generally, any statistician will say that more data is better, you have to consider the cost of getting that data. … You have to evaluate if I have that data what incremental value would I receive?"
The credit bureaus also seem to have recognized that their foray into new data sets brings with it new responsibilities.
"While there's great promise and great interest in many new types of data, ensuring the reliability and the accuracy and the completeness is a challenge," Experian's DeSoto said. "Probably the biggest challenge is really ensuring that the new types of data that we bring in meet standards and really the high requirements that are necessary in the lending marketplace."