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CFPB seeks increased lending to “credit invisible” borrowers

Accepting input on alternative borrower-rating options

The Consumer Financial Protection Bureau is joining the growing chorus of groups trying to expand debt access for consumers who lack enough loan history to obtain a credit score.

This untapped market is also known as the credit invisible.

The CFPB said it is officially is seeking public feedback on the benefits and risks of tapping alternative data sources, such as bills for mobile phones and rent payments, to make lending decisions about consumers whose lack of credit history might otherwise block opportunities.

During a field hearing in Charleston, West Virginia on Thursday, CFPB Director Richard Cordray explained that the bureau’s sole mission is to protect consumers in the financial marketplace, which includes ensuring that consumers can gain access to financial products and services that are fair, transparent and competitive.

As a result, he said the CFPB is announcing a request for information about unconventional sources of information, new ways to analyze this data, and how new technologies can help in assessing people’s creditworthiness.

“We want to learn more about whether this kind of alternative data could open up greater access to credit for many Americans who are currently stranded outside the mainstream credit system,” he said. “We also want to understand how market participants are, or could be, mitigating certain risks to consumers that may arise from these innovations.”

The CFPB stated it is specifically exploring the following topics:

1. Access to credit:

The CFPB seeks information about whether using alternative data to create or augment a credit score could increase access to credit by helping lenders better assess consumer creditworthiness.

2. Complexity of the process:

The CFPB is looking at whether the use of this information could make credit decisions more complex for both consumers and industry. This process includes lenders who must notify consumers about credit decisions and financial educators helping consumers grasp their credit standing. The bureau is examining whether the added complexity makes it harder for consumers to understand and take control of their financial lives.

3. Impact on costs and service:

The CFPB is looking into the impact of the use of alternative data, new ways to analyze it, and new technologies on costs and services in credit decisions. The bureau is studying if this may help produce a faster application process, lower operating costs for lenders, and lower loan costs for borrowers.

4. Implications for privacy and security:

The CFPB is looking into privacy and security issues in the use of alternative data that contains sensitive personal information. Consumers may not know that it has been collected and shared or how it will be used in the credit process. The bureau will also explore whether some data are more prone to errors because of weaker or different standards than data traditionally used in credit decisions, and whether consumers can correct errors in this information.

5. Impact on specific groups:

The CFPB is looking into whether the use of alternative data could affect certain groups or behaviors in unpredictable ways. The Bureau is also studying the impact on fair lending of using data that may be correlated to a person’s race, ethnicity, gender, or other attribute, and how such risks could be managed.

The bureau encourages comments from all interested members of the public, and all comments must be received on or before May 19, 2017.

And the CFPB isn’t the only one looking to explore options to expand access to credit. Earlier this month Reps. Ed Royce, R-Calif., Kyrsten Sinema, D-Az., and Terri Sewell, D-Al., introduced H.R. 898, the Credit Score Competition Act, which enables the GSEs to consider alternative credit scoring models when making mortgage purchasing decisions.

“Fannie Mae and Freddie Mac should have the ability to look beyond traditional forms of credit and take into account factors including whether or not borrowers pay their rent on time. Our bipartisan solution helps more hardworking Arizona families achieve the American Dream,” said Sinema.

Plus, the fight to introduce alternative credit scoring models at the GSEs goes even further back. Freddie Mac CEO Donald Layton told HousingWire back in November 2014 that it was looking to add other credit score providers, saying they were studying one or two alternatives to FICO.

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