Policy & Economic Research Council

1. Policy & Economic Research Council Alternative Data Initiative Furnishing, Integrating, and Using Utility and Telecom Payment Information By Patrick Walker NCRA’s 2009 National Conference November 13th, 2009

2. About PERC • Founded in 2002 • Non-partisan, non-profit policy institute devoted to research, public education, and outreach on public and economic policy matters • Dedicated to finding sustainable information- and market-based solutions for development challenges worldwide

3. Supporters of Alternative Data Initiative • Acxiom Corporation • Ashoka Foundation • Bank of America • Brookings Institution • CFED • CFSI • Consumer Data Industry Association • Equifax • Experian • GE Money • Hispanic National Mortgage Association • HSBC • JPMorgan Chase • Lexis Nexis • SAS Institute • Trans Union LLC

4. The Need for Alternative Data Access to credit crucial for asset formation (homes and small businesses) and information for risk assessment is needed to access credit Why Care? (Consumer) • 35 to 54 million Americans “unscorable” • Primarily low income, immigrants, elderly, and ethnic minorities Why Care? (Commercial) • 90% of businesses are small • 12.5% fail within 3 years often for reasons of credit access. • Black and Latino owners face greater loan denial rates (SBA)

5. The Need for Alternative Data Credit Crisis and Crunch • Stricter lending guidelines and underwriting standards • By lenders • By regulators • Reg. Z • Greater need for solid evidence and measures of credit risk and capacity • Reduction of credit extended • Bank analyst estimates a reduction of $2.7 Trillion on cards alone by end of 2010 • Stricter information needs for mortgage lending • Consumers without credit risk and capacity information excluded from lower cost mainstream financial services

6. Alt Data’s Problem and Its Promise for Asset Formation We identified and tested alternative data (energy and telecoms) as solution to risk assessment and credit access: • ADI I showed that, in principle: • mainstream lenders interested in using data to reach underserved • bureaus and data repositories were interested in collecting alt-data • furnishers had interest and were curious about reporting • But, chicken vs egg: • lenders not demanding alt data because it was absent • data agencies not collecting because not demanded • ADI II designed to show how to move together • lenders, furnisher, and foundations came together to test • Impact analysis to see who benefits • ADI III showed furnishers costs and benefits of reporting • Survey of utilities, telecoms, and other typical non-reporters • Survey of customers • Furnisher case studies • ADI IV begins major outreach based on learnings from ADI I,II, & III

7. Qualitative Research Alternative Data Initiative,Phase 1 What Data Can Make a Difference? Released December 2006 Freely Available: www.perc.net

8. Traditional “credit-like” data Non-traditional “cash-like” data Why Utilities and Telecoms? Assessed usefulness along 3 key dimensions • “Cash-like” vs. “Credit-like” (incentive to furnish) • Coverage (reach of data in population) • Concentration (resources needed to reach furnishers) Concentration of Data Furnisher Low High Energy Many Water Rental Payments Cable Consumers Utilizing Services Auto liabilityinsurance Child care Payment cards Tuition Payday loans Few

9. Barriers to Reporting Technologicalbarriers to reporting: • Complex billing cycles (footprint dependent) • Legacy IT systems Economicbarriers: • Compliance costs—FCRA data furnisher obligations • Customer service costs from lenders scaring customers substantial Regulatory barriers: • Three states have statutory prohibitions (CA, NJ, OH) • Federal prohibitions: Section 22 of the 1996 Telecommunications Act • Regulatory uncertainty at the state level

10. Quantitative Research Alternative Data Initiative,Phase 2 How Much of a Difference Can the Data Make? Released December 2006 Freely Available: www.perc.net

11. Key Findings: Expanded Access &No and Thin File Not High Risk Risk profile shows promise • Score distribution of thin-file sample similar to general population • Nearly 40% of Black unscoreables have scores above 620 when energy or telecoms data added 10% of unscoreable now scoreable and thereby able to access credit • 1 tradeline matters • Multiple tradelines are better

12. Key Findings--Greater Access for All Considerable increases in acceptance rates for a given performance level. For utilities, an increase of 6 percentage points for a 6% delinquency level. Acceptance Rates by Targeted Delinquency Rates

13. Key Findings--Greater Observed Access Access is not merely hypothetical but seen in the share of the thin-file population for which alt data is reported. (“Validation sample” = no alt data)

14. Key Findings: Increased Access for Underprivileged Social Segments Change in Acceptance Rates at 3% Delinquency Target by Race/Ethnicity Income Considerable lift for Blacks and Hispanics, Low-Income

15. Market Outcomes To Date Chicken v. Egg Solved: Created Demand • Lenders now testing and using alternative data for underwriting credit • Bureaus and CRAs now collecting more alternative data • Analytics firms creating more scoring models SYSTEMIC CHANGE--Pervasive reporting of alternative data could change the way banking is done in under-served markets.

16. Quantitative ResearchFollow-up Alternative Data Initiative, Phase 2-3: Can Alternative Data Harm Consumers? Released July 2008 Freely Available: www.perc.net

17. Key Findings:Answering Follow-up Questions Contra fear that alt data harms: • No evidence of credit score deterioration over time when alt data is included • No evidence of alt-data scoreables becoming over-extended and having declines in credit scores. Evidence suggests thatreporting payment data serves both as a consumer protection and a system wide protection.

18. Original Finding: Little Effect on Scores Change in Credit Score with the Addition of Utility Payment Data (Statics from March 2005) But finding is based on static information

19. Key Findings: Picture Remains Over Time Changes in Score for Consumers with Alternative Data Over a 1-year Period, by Number of Trade Lines (from March 2005 to March 2006) Scores increased for consumers by a larger degree than they decreased over the year-long period

20. Key Findings: Scores Go Up Over Time with New Accounts Average Scores Increase with the Age of the Financial Account, for all and for all racial segments

21. Key Findings: Scores Go Up Over Time with New Accounts Average Scores Increase with the Age of the Financial Account, for all and for income segments

22. Quantitative Research Follow-up You Score, You Win The Consequences Of Giving Credit Where Credit Is Due Policy Concerns and Considerations

23. Near Term and Future Promise:What’s At Stake in Policy Questions In wake of mortgage crisis, draft FHA Modernization Act of 2007 § 257 (a): • “[P]ilot program to establish an automated process for providing alternative credit rating information for residences to be insured under this title who have insufficient credit histories for determining their creditworthiness.” • Alternative credit information may include: • rent, • utilities, • and insurance payment histories, • “and such other information as the Secretary considers appropriate” Proposed projects such as these to salvage homeownership can greatly benefit from opening the alt data tap

24. Policy Change and Policy Clarity:Answering Follow-up Questions Identified first in ADI I, but feedback shows a consistent lessons: • Where statutory barriers exist (direct and indirect) must be removed • States: CA (telecom), OH (publicly owned), NJ • Federal: Section 222 of the Telecommunications Act of 1996 • Regulatory uncertainty • More pervasive • Requires public affirmations

25. Policy Options:Opt-In v. Opt-Out Lessons from elsewhere: • Retirement programs • Opt-out systems have initial enrollment rate of 90% rising to 98% vs. • Opt-in systems which have enrollments of 20% rising to 65% • Organ donation: European countries where opt-out of organ donor have higher rates than where citizen opts-in • Austria (opt-out) has 99.9% rate v. Germany (opt-in) which has 12% rate • Sweden (opt-out) has 86% rate v. Denmark (opt-in) which has 4.3% • France (opt-out) has 99.9% rate v. U.K. (opt-in) which has 17.2% rate Default Settings Matter

26. Research on the Supply Side Alternative Data Initiative, Phase 3 Will the Data be Reported? Is there a business case? Released March 2009 Freely Available: www.infopolicy.org

27. Utility and Telecom survey Average firm benefits of fully reporting are several times the costs Benefits include fewer delinquencies, decline in accounts in arrears, and improved cash-flow Costs include IT upgrades, conducting new processes, and new customer service demands All firms reported benefits > costs 10% of firms in survey currently fully report to a bureau 89% currently refer delinquencies to a collections agency ADI: Phase 3

28. Customer Survey Half of customers surveyed would be more likely to prioritize a utility or telecom payment if they knew it was fully reported No income or ethnic group appears to be more informed as to which payments are fully reported and which are not No evidence that any of the subgroups disproportionately use the fact that some payments are not fully reported to ease cash-flow problems ADI: Phase 3

29. Case Studies of firms that fully report: The DTE Case DTE Energy Serves over 3.5 million customers Includes Detroit Edison (electric) and MichCon (natural gas) August 2006 began fully reporting to credit bureaus 8.1% of DTE’s customers either gained a credit file or a credit score due to DTE’s decision to fully report customer payment data Most customers that were scoreable prior to August 2006 had little or no change in their credit score when the DTE tradeline was added ADI: Phase 3

30. ADI: Phase 4 Alternative Data Initiative, Taking Care of the Supply Side: Inducing Reporting

31. Policymaker and Government Track Respond to questions and concerns from lawmakers, regulators, and media Federal level State level PUCs, NARUC NCSL, NGA, NAAG Furnisher Education & Outreach Exhort full reporting Strategic events (USTA, RMA, EEI, AGA, CTIA) Stand alone events ADI: Phase 4

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