Prospective home buyers have long been subject to a type of financial profiling to help determine their eligibility for a mortgage -- and chief among them has been the credit score. Thanks to a change to its underwriting system earlier this year, mortgage giant Fannie Mae now includes rental payment history as a factor when considering a person's mortgage eligibility. The company says its goal is to make the mortgage application process fairer and more equitable for all Americans -- and particularly those with checkered or modest credit histories.
The new underwriting system has perhaps the highest potential to help Americans of color, who traditionally have less access to credit or lower credit scores than other groups, due to a legacy of credit discrimination throughout the financial industry. Fannie Mae says it hopes that incorporating applicants' rental payment history into the mortgage application process will help change that.
"It seems obvious that if someone is paying rent consistently it's likely they could and would pay their mortgage consistently, too," Hugh Frater, chief executive officer of Fannie Mae, wrote in a blog post in August. "This is one important step in correcting housing inequities."
In an analysis of a recent sample of mortgage applicants who had not owned a home in the past three years and did not receive a favorable recommendation from its underwriting system, Fannie Mae estimated that its new, more inclusive underwriting system could have increased the number of Americans being eligible or approved for a mortgage by 17%.
Although the new system represents an opportunity for marginalized homebuyers, there are privacy concerns that counterbalance the potential benefits, according to privacy experts. The program requires applicants to consent to a search of their bank statements -- a more invasive step, though only incrementally so, than what is typically required in a mortgage application process.
How does positive rental payment history work?
A key tenet of Fannie Mae's new underwriting system is that it counts an applicant's positive rental history -- so missed payments aren't counted against your application. Rental payments of at least $300 made over 12 consecutive months will now count towards your financial standing on a mortgage application.
To qualify for this program, you must be a "first-time" homebuyer purchasing a primary residence. You may not have bought another home within the past three years. And credit score is still a factor; you'll need a minimum score of 620 to be eligible.
With your consent, Fannie Mae's automated underwriting software will scan your bank account and automatically identify payment patterns to capture the details of your rent payments over the last 12 months. Fannie Mae says that its software can identify a variety of transaction types -- including rent payments made by check and peer-to-peer payments made on Venmo, Zelle and other platforms.
What are the downsides to including your rent payments in your mortgage application?
Allowing an automated algorithm to comb through every purchase you make may help you buy a home, but like any new technology, it can also have unintended consequences if managed improperly.
"Innovations like this must be used very carefully," said Jason Kelley, associate director of digital strategy and activism at the Electronic Frontier Foundation. "The potential privacy implications depend on how this data is collected, what additional third parties are involved in that process, and how the data is maintained after it's collected." It's also unclear how much additional data must be collected for the automated system to make its decisions, Kelley said.
Giving financial companies access to our data in exchange for any benefit is something to be wary of, Kelley said. Plus, we already know that sometimes algorithms don't remove bias -- instead, they often exacerbate and replicate biases while masking them behind opaque and complicated formulas, he said. The algorithms make it hard to understand what data they're drawing from to make their decisions, and that lack of transparency can exacerbate inequality rather than help alleviate it.
Do the potential upsides outweigh privacy concerns overall?
Buying a first home remains one of the best ways for Americans to build wealth. Homeowners have a median net worth 40 times higher than renters: In 2019, the median net worth of homeowners was $255,000 compared to just $6,300 for renters, according to the Federal Reserve's Survey of Consumer Finances. And most mortgage applicants are already required to hand over many financial documents. So in that sense, access to your bank account may not constitute a dramatic violation -- and it could be worth the potential risk.
"There's zero negative impact on any of these borrowers, it can only be positive, and this especially helps those that are credit invisible or have challenges building credit, but are ultimately paying rent consistently and on time," said Brian Rugg, LoanDepot's chief credit officer.
The bottom line for most Americans with low credit scores?
"I think it's a very valuable option, and I think there's only an upside for those borrowers who are making payments and ultimately not getting credit for it," Rugg said.