How the CFPB Should “Regulate” Credit Reporting and Credit Scoring

Governmental agencies such as the CIA, FDA, and EPA are familiar to most of us, and we have a general understanding of their focus.  But how many of you have heard about the CFPB?  If you are not currently familiar with the CFPB, don’t worry—you will likely soon be, as it will touch all of us in a variety of different ways.

This week, on July 21^st, the Consumer Financial Protection Bureau (CFPB) is officially “open for business”—a year after the Dodd-Frank Wall Street Reform and Consumer Protection Act became law. According to the CFPB website (www.consumerfinance.gov), the CFPB will work to make sure that consumers have the information they need to understand the terms of their agreements with financial companies. It will also work to make regulations and guidance as clear and streamlined as possible so providers of consumer financial products and services can follow the rules on their own.

[Related Articles: The Consumer Financial Protection Bureau]

Among other things, the CFPB will:

• Create consumer protection laws, as well as supervise and enforce them
• Restrict unfair, deceptive, or abusive acts or practices
• Create a center to take consumer complaints
• Promote financial education
• Research consumer behavior
• Monitor financial markets for new risks to consumers
• Enforce laws that outlaw discrimination and other unfair treatment in consumer finance

In addition, the CFPB will also supervise credit reporting agencies (including Equifax, Experian and TransUnion) as well as credit score developers such as FICO and VantageScore. While the official open date is this week, the CFPB has already been busy recruiting staff, creating the infrastructure required to launch and run a new agency, as well as prioritizing focus amidst their wide range of responsibilities. I for one specifically look forward to hearing about the areas of focus as it pertains to credit reporting and credit scoring.

Key Credit Industry Issues for the CFPB »

Image: Consumer Financial Protection Bureau, via Flickr

Based on what I hear from consumers and the credit granting industry in general, it would be ideal if the CFPB plans to research and work with the relevant industry stakeholders to address the six frequently discussed credit topics below:

I. Accuracy of Credit Bureau Data

Consumer credit is such a critical element in the day-to-day functioning of our economy, as hundreds of millions of dollars for goods and services are handled via credit in the U.S. each day. Given this fact, it is critical not only for the individual consumer, but for the economy as a whole, that the underlying consumer credit data on each of us is as accurate as possible.

Historically, there have been numerous studies commissioned and conducted by a variety of different entities with different objectives and methodologies attempting to quantify the quality of credit bureau data and to estimate the associated impact that results from inaccurate reporting. The findings and conclusions are wide ranging.

Given the importance of this topic, I am hopeful that the CFPB will work closely with the industry, other governmental agencies as well as consumers to create an approach or method to accurately (and on a recurring basis) quantify the prevalence of inaccurately reported credit bureau data that has a material impact on a consumer’s access to credit.

[Related: How to Order Your Free Annual Credit Report]

II. Effectiveness of the Dispute Process

With an understanding of the prevalence of inaccurate data established (see point above), another logical area of focus is the reviewing of processes available to consumers to dispute and resolve inaccurate data on their credit reports through a well-designed examination process. Opportunities uncovered to enhance this process will benefit the entire credit-granting industry as well as consumers.

How does the current dispute resolution process work and is it effective for all parties involved (the consumer, lenders, credit bureaus)? Are there opportunities to enhance the process, technologies or approach that will increase speed and improve accuracy?

III. Alternative Credit History Data

While the majority of U.S. consumers actively participate in the credit economy and have credit histories and credit scores, it is estimated that 30 to 50 million people do not have or use traditional forms of credit (credit cards, auto loans, a mortgage, etc.) and do not have a traditional credit report as a result.  While a percentage of these consumers willingly opt out of using credit, many others are using alternative types of credit (cell phones, checking accounts, etc.) and/or demonstrating ability to pay as agreed on various types of credit (utility bills, rent, etc.) that are oftentimes not reported, or not reported consistently, to the national credit bureaus.

Studies have been conducted by various industry entities showcasing the predictive value this alternative credit information (both positive and negative data elements) can provide if accessed and considered in the lending review process—both for the credit-underserved and for those who have a full credit report. In addition, some of this alternative data is already available via other credit reporting agencies for access by lenders in their credit review decision process, but it is not as commonly accessed as are traditional credit bureau reports.

Perhaps the CFPB can conduct additional research to help quantify the value such alternative data can provide in predicting credit risk and work with the industry to consider such alternative data when making credit decisions on credit applicants with little to no traditional credit histories. This focus could potentially help incremental consumers eventually gain access to more affordable mainstream credit options.

IV. Access to the Credit Score Lenders Use »

Image: Sabrina K, via Flickr

IV. Access to the Credit Score Lenders Use

I see a lot of inquiries from consumers wanting to know if the score they received or purchased from “x” website is the same score that a lender would access and use. Some sites provide access to the FICO or VantageScore scores which are two brands of credit score that may be purchased and used by lenders.  Other sites may provide access to what are called educational scores that are not made available to lenders or that very few lenders obtain when making a credit review decision.

It is not always clear to the consumer which type of score is being delivered and the score ranges of the various credit score options are often similar enough that the consumer may assume the educational score version they received has the same meaning in terms of future risk as the credit score a lender would pull and use.

In my opinion this is about transparency to the consumer. Let the consumer know up front the branded name of the score and if it is materially used by lenders or if it is instead an educational score. The consumer can then decide what score version they want with full awareness of the score type.

In addition, many consumers have expressed frustration that they cannot purchase or proactively gain access to the same score brand that lenders access for credit decisions based on credit information at each of the three credit bureaus.

It is my understanding that the CFPB is already focused on this particular subject and I look forward to reading their research findings and understanding any new direction they may provide to the industry.

[Resource: Where Can I Get My Credit Scores for Free?]

V. Consumer Credit Education

Increasing and improving consumer financial literacy is an important focus of the CFPB and one that I fully support.  In my opinion, the industry has done a decent job of creating informative educational content via a variety of different formats and delivery channels regarding how credit reporting and credit scores generally work.

As the saying goes, “you can lead a horse to the water, but you can’t make him drink.”  This is true for credit education efforts.  A continual challenge seems to be getting consumers to actively take advantage of all this robust educational material already in existence.  Perhaps the CFPB will come up with creative ways to instill consumers with a desire to increase their knowledge about credit reports, scores and lending processes—something that is especially critical for younger people who are about to enter the credit world.

VI. Policy Decisions based on Empirical Findings

There are instances where policy decisions are recommended or made to exclude various data elements that are contained in the credit report from being displayed or being considered in a credit score. Two recent examples include the decision by the IRS to not report tax liens that have been paid and a proposal to delete from the credit report any paid or settled medical collection trade with an original amount of less than $2,500.

[Related Articles: New IRS Rule Could Impact Credit Scores, Scratching Medical Debt from Credit Reports: The Cons]

Lenders rely on credit report data to help them understand the future credit risk of applicants. The mandatory removal of predictive data elements could, in effect, misrepresent the true risk of that applicant and potentially provide them with access to additional credit they can’t successfully manage. It would be helpful if the CFPB could be called upon to conduct research regarding the predictive value of such data and impact of their removal when these policy decisions occur, and to share their research findings with appropriate industry and other governmental entities so that all participants can make a more informed decision about the inclusion (or not) of various data elements based in part on empirical findings.

These are just a few examples of how I can see the CFPB working with industry entities to provide value in the credit reporting/credit score space. I am sure there are many other agenda items that will surface and I anticipate we will see a lot of CFPB activity in the near future.  We will help you keep track of it here at Credit.com.

Do you have ideas or issues that you would like to share with the CFPB? Click here and follow the directions to enter your question or comment.

Image: Consumer Financial Protection Bureau, via Flickr