Lenders’ data mining goes deep
Mortgage makers are going beyond tax returns and bank statements to determine whether you’re a good risk. They’re checking such things as where you have pizza delivered and where you shop online.
July 18, 2010
Reporting from Washington —
There’s a big stretch between making a house payment and paying for a pizza. But it’s not what you pay for carryout that matters, at least not in the eyes of lenders. It’s where the food was delivered.
Ordering takeout proves that you live where you say you do, and that helps lenders uncover the crook who claims to live in the property he is trying to refinance when he really lives hundreds of miles away. Or expose the 35-year-old who says he has a $1,200-a-month apartment when he really lives rent-free with Mom and Dad.
“If the data is available and it can be obtained legally, I’m going to test it,” says Alex Santos, president of Digital Risk, an Orlando, Fla., analytics firm that works with lenders and investors to build better underwriting mousetraps. “If it is inexpensive and makes my credit model better, I’m going to use it.”
Digital Risk is just one of numerous risk-management companies that are continuously probing for ways to help clients quantify their risk, prevent fraud and otherwise ensure the quality of their loans. And they’re going to extraordinary lengths to do so.
For example, they might peek into your online-buying habits. After all, the reasoning goes, someone who buys his shirts from a Brooks Brothers catalog may have more disposable income than someone who shops at JCPenney.
“At least that’s a theory we can test,” Santos says. “We’re looking for any type of data source that you can plug into a computer. It takes only a month of trial and error to determine whether the information can help [determine credit risk] or not. We have a hypothesis, push a button, and the computer tells us whether the data is predictive or not.”
This sort of data mining goes way beyond your credit score, that financial snapshot that measures your ability and willingness to repay your debt. And, Santos says, “there’s a tremendous amount of this kind of analytics going on right now.”
Lenders are still checking credit histories, not just when you apply for a mortgage but also a second time a day or two before the loan closes. But your credit score — known as a FICO score for the name of the company that created the scoring formula — is now considered “too broad.” Consequently, it has moved down in the hierarchy of tests that lenders are using to make certain that someone isn’t hoodwinking them.
First and foremost, lenders are pulling copies of your tax returns directly from Uncle Sam.
Don’t be alarmed. You give the lender permission to do that when you sign Form 4506-T. The idea here is to make sure that you haven’t altered the copy of your last two years’ tax returns that you provided when you signed your loan application. Lenders want to know if you might have exaggerated how much you earned.