For people without a credit history but a desire to build their credit, a new law allows you to create an alternative credit report and use that report in a credit application.

Q: In our local paper you stated that a federal law required lenders to do a manual underwriting to approve a borrower’s loan when a credit score is non-existent due to lack of credit.

I have a small mortgage brokerage in Newport, Oregon and I need the name or code of the law that states this fact. It could help a lot of folks if I can convince the lenders to do this. We have a lot of good borrowers, who do not have debt and have always paid cash for everything so they do not have a score.

A: You might have misread or understood the story. There is a recent federal law that allows borrowers to use alternative credit histories and scores with lenders. And lenders are required to consider these alternative credit scores and histories in evaluating the borrower.

The rule you might want to look at is the Equal Credit Opportunity Act (ECOA), Regulation B and its rules. The ECOA allows for the creation of a borrower’s credit history using non-traditional credit reporting bureaus. Many borrowers find themselves paying cash for transactions, not owning a credit card, home or auto and having little debt. Credit reporting agencies say this type of borrower has a “thin” credit file. It’s hard to establish credit-worthiness with traditional means if the borrower doesn’t have enough credit lines.

In these circumstances, these borrowers may fall below the radar screen of most traditional credit reporting mechanisms.

There are companies developing systems that can utilize other financial information to assist borrowers in creating a credit history and developing a credit score. These other systems may work with and alongside traditional credit reporting companies but can give a creditor greater information about the borrower.

We recently became involved with one of these companies,, and now sit on their advisory board. The site assists borrowers by aggregating self-reported payments to landlords, other monthly expenses, utility and other payments that are not ordinarily reported to credit reporting companies. Through the self-reporting mechanism, and later a verification process, the borrower develops a history of payments and a proprietary credit score to secure financing from traditional lenders.

As you have seen, there are lots of good borrowers out there without debt, who pay cash for everything, including utility payments. As alternative credit reporting becomes more popular, you may have an easier time delivering a loan file to a lender.

Other borrowers may have bad credit and need to improve their credit. If they filed for bankruptcy, they may have lost their credit cards and other usual methods to use credit and have that credit use reported to credit reporting bureaus. Without those normal channels, these alternative credit companies give consumers the ability to self-report their credit use, have those reports validated and create and build a credit history for themselves.

Today, lenders are required to review and consider the borrower’s alternative file. But they are not required to base a decision on alternative credit. We see that as a good next step toward reopening the well of credit toward many worthy borrowers.