Redefining Risk Models

New & Views
By Michael Toner, On-site.com

Traditionally, Fair Isaac Corporation (FICO) was the data provider for credit models used throughout the residential real estate industry. But after years of significant errors and inconsistent scores, two new models were developed, i.e., Vantage, which uses data compiled and shared by the three major credit bureaus, and Next Generation, an upgraded version of FICO.

Outside of the confusion created by additional choices and who’s providing what, the methodology continues to be the same in both new models, which focus exclusively on the scoring of credit reports. One significant difference between the two models is that Vantage has added a scoring feature based upon the letters A, B, C, D and F. Unfortunately, the new models also continue to ignore key information needed by the multi-family industry, such as Landlord/Tenant Court and Criminal records. Conventional risk models, as such, have proven to be only marginally useful to property owners and managers because of the pertinent information that’s missing. Histories of landlord-tenant disputes are not addressed in these reports, yet nationwide, one out of ten applicants has been involved in a landlord-tenant dispute. Moreover, a quarter of that group shows excellent credit ratings, regardless of non-payment or holdover activities being taken in the past. In one of our own samples, we found that 46.3 percent of an applicant pool, nationwide, had good-to-excellent FICO scores, and of those who had been evicted in the past, 26.6 percent still had credit scores exceeding 700 points!

To fill the information gap and truly serve the needs of the multi-family housing industry, On-Site.com developed a risk model based upon criteria that are specifically relevant for qualifying prospective residents. We created our own scoring system by analyzing multiple background screens, with the applicant’s income and conventional credit data implemented only as a starting point.

Credit History and Income
Raw data for our credit histories are provided by FICO, from which we develop a base to determine such seminal factors as debt load to usable income. Unlike typical models, we focus on how much of an applicant’s earnings remain after paying rent and other debts. Such factors as child support, spousal support, student loans and payment histories help us establish the net income to rent ratio. In addition to creating an accurate net income profile for an applicant, this information is helpful for communities with a mix of unit prices.

Landlord-Tenant Court Records
As previously noted, Landlord-Tenant Court records are rarely factored into traditional credit reports, yet provide vital information on prospective residents through predictive information. Eviction records, which are obtained from multiple sources and vary according to jurisdiction, provide a critical window as to the quality of a resident. Moreover, it often undermines the efficacy of the credit score and provides a more accurate predictive risk model.

Criminal Histories
How criminal histories influence leasing decisions are relative to the severity of the crime, but are important considerations when reviewing applications. Only crimes that may be reasonably assumed to jeopardize the safety of the community or the applicant’s ability to pay rent can be considered for purposes of qualifying or disqualifying. We also recommend that landlords prepare a clear policy distinguishing between crimes that are important to being a resident and infractions that are not relevant to the good of the community.

Sex Offender Records
On-Site.com reviews records listing registered sex offenders. But again, the law prohibits discrimination under many circumstances. Some jurisdictions have complex rules on how these records may be used in the screening process, so owners and managers should review all regulations with their screening provider and legal counsel.

Terrorist Records
The federal government provides guidelines on what comprises a threat and what kind of investigation is allowable. Because this is relatively new ground, it is imperative to review the information with the screening provider and legal counsel.

Landlord Reviews
Landlord Reviews provide information that credit and various court records cannot, because they contain accounts of a resident’s history within a multi-family community. A resident who in the past ignored parking restrictions, neglected to curb a dog or incessantly complained to management, will likely be problematic in the next apartment community. Basic resident histories are particularly useful for applicants’ profiles.

Another reason we developed a more comprehensive risk model is that relying exclusively on credit history in this context may be interpreted as discrimination pursuant to the Fair Housing Act. Because conventional credit models are based upon a consumer’s “financial age,” young people who are new to the credit-granting world do not meet the “length of time credit has been established” criterion, which may be interpreted as discrimination. Even more egregious is the fact that the FICO model ostensibly punishes consumers for the very reason landlords should embrace them: they don’t carry enough debt on their credit cards because they pay off their balances.

On-Site.com developed its own credit rating system to specifically address the needs of the multi-family industry. Landlords and their properties need to be protected from errant or litigious tenants and, in a world replete with information, there’s no excuse for relying on incomplete records or faulty data. Tenant screening technology gives us the ability to determine the best residents through a wealth of predictive data and we’re providing it to the landlords and managers of large communities, we well as independent property owners, nationwide.