Credit Data Firm Equifax Ties Loan Risk to Residence; Advocates Wary

A leading credit information service is offering lenders a way to gauge loan risk by considering where borrowers live as well as how promptly they pay their bills, an approach that raises red flags for consumer groups.

Equifax Inc. said its Bankruptcy Navigator system, introduced Wednesday, will give banks and other lenders one more tool to determine if they should charge higher interest, offer pre-approved credit cards, adjust lending limits or extend credit at all in areas with low ratings.

Consumer advocates complained that credit-worthy borrowers could be hurt.

“Why should my credit depend on whether my neighbor pays his bills?” asked Janice Shields, an accountant and consumer research director for the U.S. Public Interest Research Group, an advocacy group founded by Ralph Nader. “If I have a job, whether my neighbor is unemployed is irrelevant.

“If the formula is wrong, then people are going to be denied credit who should get it, or people are going to be paying higher rates than they should be,” she said.

Some banks and mortgage lenders have been fined for using formulas that fostered a now-outlawed practice known as redlining, in which whole neighborhoods were denied loans because they failed to meet economic tests.

But the practice appears to be on the decline. On Wednesday, the Treasury Department’s Office of the Comptroller reported that home loans to minorities increased three times faster than total mortgage lending over the last two years.

Among big cities, Atlanta, Phoenix, Detroit, Houston and Cleveland showed the most improvement. Still, consumer groups say, some lenders refuse to lend or will charge higher rates depending on where people live.

The Office of the Comptroller, which regulates national banks, said mortgage lending to minority customers was up 33.3% in 1995 over the level in 1993. Overall mortgage lending during the period rose just 9.67%.

Treasury Secretary Robert E. Rubin said there had been a renewed effort by financial institutions to improve their lending practices.

“There is no question that the banking industry is taking this very seriously,” Rubin said. “There are now big banks all over the country that are lending in areas that they previously did not get involved in.”

Allen J. Fishbein, general counsel for the Center for Community Change, an advocacy group involved in fair-lending issues, said he was encouraged by the report. But he cautioned that the huge percentage gains in many cases overstated the improvements because the lending was starting from very low levels.

“This shows that all of the attention that has been paid to this problem is beginning to pay off, but there is still a long way to go,” Fishbein said.

New York-based Equifax said it has no intention of discriminating against borrowers. It said the purpose of Bankruptcy Navigator is to help lenders find good credit risks in areas that may have a slumping economy.

The program, which includes demographic research data, is designed to help banks, credit card companies and other lenders monitor and forecast payment problems with existing customers and determine areas where late payments or bankruptcies might rise.

The program is also designed to assist lenders in counseling borrowers who are in danger of defaulting or filing bankruptcy, and in helping lenders with legal issues after a borrower seeks court protection from creditors.

Equifax is scheduled to begin market-testing the product within two weeks and plans to make it available at the beginning of next year.

Bankruptcy Navigator, developed with the WEFA economic consulting firm in suburban Philadelphia, helps lenders target their loans across 231 areas of the country by identifying where loans have the lowest risk of souring.

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Lending a Hand

Percentage increase of home loans, by volume, from 1993 to 1995, to minority borrowers and all borrowers:

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State Minority All Ala. 43.65% 9.03% Alaska 53.37 26.36 Ariz. 61.00 29.30 Ark. 61.71 34.46 Calif. 13.28 2.35 Colo. 22.55 -2.41 Conn. 45.25 7.30 Del. 46.68 13.40 D.C. 23.48 1.30 Fla. 38.76 10.90 Ga. 72.21 26.55 Hawaii -25.73 -20.80 Idaho 99.38 48.92 Ill. 22.22 1.64 Ind. 49.30 11.50 Iowa 46.93 9.08 Kan. 28.59 1.09 Ky. 24.96 4.94 La. 46.07 14.34 Maine 55.70 29.02 Md. 12.78 -8.73 Mass. 35.99 10.10 Mich. 60.13 25.42 Minn. 33.77 -7.57 Miss. 74.04 35.10 Mo. 46.58 15.27 Mont. 36.91 39.93 Neb. 53.69 14.92 Nev. 80.24 33.28 N.H. 35.96 27.15 N.J. 29.95 0.84 N.M. 42.81 22.09 N.Y. 39.96 6.34 N.C. 60.47 32.43 N.D. 71.08 13.43 Ohio 25.87 3.61 Okla. 36.19 5.22 Ore. 33.43 14.21 Pa. 39.17 1.21 R.I. 33.23 1.26 S.C. 62.37 35.22 S.D. 60.00 25.79 Tenn. 64.76 30.05 Texas 43.89 15.24 Utah 76.79 15.61 Vt. 12.73 -7.07 Va. 19.20 -2.88 Wash. 16.88 -3.39 W.Va. 82.23 32.53 Wis. 8.80 0.68 Wyo. 64.33 25.85 U.S. 33.30 9.67

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Source: Treasury Department