CFPB Trying to Help Unbanked Consumers Obtain Credit
The Consumer Financial Protection Bureau has launched an inquiry in an effort to help unbanked Americans gain access to credit.
Lenders generally use a traditional credit history and credit score to make a decision about whether to extend credit to a potential borrower. Traditional credit histories are made up of a borrower’s debt payments on mortgages, credit cards and other loans. However, it is difficult for creditors to make decisions about people who are “credit invisible” or simply lack the credit history necessary for a credit score. The CFPB wants public feedback on the benefits and risks of examining alternative data sources, such as mobile phone bills or rent payments, to make lending decisions.
“Alternative data from unconventional sources may help consumers who are stuck outside the system build a credit history to access mainstream credit sources,” said CFPB Director Richard Cordray. “We want to learn more about whether this non-traditional approach can offer opportunities to millions of Americans who are credit invisible and how to minimize any risks in how this information is used.”
The CFPB estimates that 26 million Americans are credit invisible, which means they have no credit history, and 19 million Americans do not have a credit history extensive enough for a credit decision.
Credit bureaus use a consumer’s credit history to assign them a credit score, which ranges from 300 to 850, and it is based off someone’s payment record, the amount of debt they already have and other factors. This score is meant to predict the likelihood a consumer will repay their debt, and a higher score increases the chance that someone will qualify for a loan or earn a better interest rate.
Without a sufficient credit history, Americans may find it difficult to qualify for a loan, or they will pay a steep price for credit through higher interest rates and fees. It is a problem the CFPB says mostly impacts Black or Hispanic consumers and those who live in low-income neighborhoods. Recent immigrants, young people and those who are recently widowed or divorced are also affected. Often, these people may resort to high-cost loans not reported to credit bureaus, which means their payment history will not help their credit score.
The CFPB hopes “alternative data” could be the answer. Alternative data pulls from mobile phone payments and rent, and examines bank transactions, such as deposits, withdrawals and transfers. This information could demonstrate to lenders that a potential borrower has a history of meeting obligations, which would not normally show up on a credit report. This could help the underserved have more access to credit or qualify for lower borrowing costs.
The Bureau is also looking at any potential risks associated with this type of data collecting, including whether this data would be inconsistent, incomplete, incorrect, overgeneralized or biased.