Realtors, home builders and first-time home buyers got a potentially important new financial tool last week: An alternative credit score designed for consumers with minimal traditional banking and credit histories.

The new score -- dubbed the "FICO Expansion" score by its developer, Fair Isaac Corp. -- could be especially useful for realty professionals seeking to qualify immigrant, ethnic minority and first-time home buyers. In contrast with traditional FICO scores heavily used by mortgage lenders, the new score will use non-traditional information that the national credit bureaus -- Equifax, Experian and Trans Union -- are not equipped to collect: apartment rental payment histories, pay day loans, utility bills, rent-to-own payment histories, cable TV and telephone bill records and other data.

To produce the new scores, Fair Isaac has created a new quasi-credit bureau that will assemble consumers' raw data and run it through the "expansion score" software. Fair Isaac says the scores will be "highly predictive" of loan applicants' future payment performances on home mortgages. Starting this week, mortgage lenders will be able to order alternative FICO scores on prospective home purchasers directly from Fair Isaac Credit Services, Inc., the new FICO subsidiary. The scores will not be available through the national credit bureaus, the source of all traditional FICO scores.

"This extension of the FICO score gives lenders another powerful tool for building their presence in high-demand and emerging markets," said Tom Grudnowski, CEO of Fair Isaac. The direct beneficiaries will be consumers "who have missed out on opportunities simply because they lack a traditional credit history."

Fair Isaac researchers estimate that over 50 million adults in the U.S. do not have sufficient credit information on file at the national bureaus to generate a traditional FICO score. That's a huge problem for those consumers when they seek to buy a house because FICO scores are typically required by lenders to assess credit risk and to price mortgages. Applicants with no FICO score, or a score depressed by a minimal amount of credit data on file, frequently are either rejected for a mortgage or forced to pay high interest rates and fees.

Many of the 50 million-plus adults with "thin" or no credit files are ethnic minorities and immigrants who make little use of banks, checking accounts or credit cars. Others are young Americans who are just starting out in their work careers and have not yet had many dealings with banking institutions. The traditional FICO risk scoring system is data-dependent: It rewards consumers who have had extensive credit histories and on-time payments documented by the national credit bureaus. It penalizes those who do not fit this mold.

The new score will run from 150 to 950, with higher scores signifying lower risks of payment defaults to mortgage lenders. Traditional FICO scores run in a slightly narrower band, from 300 to about 850. By focusing heavily on rent payments and other data passed over by the national bureaus, the new FICO score should be able to convert thousands of would-be home buyers -- currently locked out of the market or charged outrageously high interest rates -- into fully-scored purchasers with standard-priced mortgages. (More information on the "expansion score" is available at www.myFICO.com/Business.)

Published: August 2, 2004

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.