Prospective home buyers have long been subjected to a type of financial profiling to help determine their eligibility for a mortgage – the credit score being the most prominent of these. Following a change to its underwriting system earlier this year, mortgage giant Fannie Mae now considers a person’s rental payment history when determining mortgage eligibility. According to the company, its goal is to make the mortgage application process fairer and more equitable for all Americans, particularly those with poor or limited credit histories.
The new underwriting system has the greatest potential to assist Americans of color, who have historically had less access to credit or lower credit scores than other groups due to a legacy of credit discrimination in the financial industry. According to Fannie Mae, 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, Fannie Mae’s CEO, wrote in an August blog post. “This is a critical step toward addressing housing inequities.”
Fannie Mae estimated that its new, more inclusive underwriting system could have increased the number of Americans eligible or approved for a mortgage by 17 percent based on an analysis of a recent sample of mortgage applicants who had not owned a home in the previous three years and did not receive a favorable recommendation from its underwriting system.
According to privacy experts, while the new system represents an opportunity for marginalized homebuyers, there are privacy concerns that outweigh the potential benefits. The program requires applicants to consent to a search of their bank statements, which is a more invasive step than is typically required in the mortgage application process.
One key tenet of Fannie Mae’s new underwriting system is that it considers an applicant’s positive rental history, so missed payments aren’t considered. Rental payments of at least $300 made over a 12-month period will now be considered in your financial standing when applying for a mortgage.
You must be a “first-time” homebuyer purchasing a primary residence to be eligible for this program. You may not have purchased a new home in the last three years. And your credit score is still an issue; you must have a minimum score of 620 to be considered.
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 with your permission. According to Fannie Mae, its software can recognize a wide range of transaction types, including rent payments made by check and peer-to-peer payments made on Venmo, Zelle, and other platforms. Allowing an automated algorithm to comb through every purchase you make may assist you in purchasing a home, but as with any new technology, it can have unintended consequences if used incorrectly.
“Innovations like this must be used very carefully,” said Jason Kelley, the Electronic Frontier Foundation’s associate director of digital strategy and activism. According to Kelley, it is also unclear how much additional data must be collected for the automated system to make its decisions.
Giving financial companies access to our data in exchange for any benefit, according to Kelley, is something to be wary of. Furthermore, we already know that algorithms do not always remove bias; instead, they frequently exacerbate and replicate biases while masking them behind opaque and complicated formulas, he claims. The algorithms make it difficult to understand what data they’re using to make their decisions, and this lack of transparency can exacerbate rather than alleviate inequality.
Purchasing a first home remains one of the most effective ways for Americans to accumulate wealth. Homeowners have a median net worth that is 40 times that of renters: According to the Federal Reserve’s Survey of Consumer Finances, the median net worth of homeowners in 2019 was $255,000, compared to just $6,300 for renters. 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.