Mario Anzuoni | Reuters
Person using an Apple iPhone
Help could soon be in sight for consumers who lack enough financial history to get credit scores and qualify for affordable loans.
The Consumer Financial Protection Bureau on Thursday sought public feedback about using alternative data sources such as mobile phone bills and rent payments to make lending decisions for consumers whose lack of detailed credit history could block them from financial opportunities.
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"Alternative data from unconventional sources may help consumers who are stuck outside the system build a credit history to access mainstream credit sources," CFPB Director Richard Cordray said in a statement announcing the exploration. "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."
Credit scores are typically calculated by the three major nationwide consumer reporting agencies: Equifax, Experian and TransUnion. The scores are typically based on financial records that show debt amounts, whether payments are made on time, and whether any debts or bills have been sent to collectors for non-payment. Records of liens, judgments and bankruptcies may also figure in the calculations.
The records are analyzed with mathematical scoring models used to predict the likelihood that consumers will repay debts as agreed. The resulting credit scores typically range from 300 to 850, with higher scores making it easier to qualify for loans and more favorable interest rates.
However, approximately 26 million Americans have no credit histories, the CFPB estimates. An additional 19 million consumers have credit histories that are either outdated or lack enough information to produce a credit score, the regulator said.
In a formal request for information, the CFPB sought comments on the potential benefits and risks of using alternative financial data that could help low-income and underserved Americans gain access to credit. The issues being explored include:
- Whether consumers with no credit history but records of paying bills for utilities, mobile phones and rent on time could be deemed viable credit risks by lenders.
- The possibility that using alternative data could make credit decisions more complex for both consumers and lenders.
- Potential security and privacy implications, as well as any impact on costs and service in credit decisions.
- Whether using alternative data could affect some groups in unpredictable ways. For instance, U.S. military personnel may move frequently, which could produce a false impression of financial instability.
Some consumer reporting agencies welcomed the CFPB action.
Equifax spokesman Paul Zurawski said in a statement that the company manages payment data for telecommunication and utility companies and "recognizes the opportunities that these data can unlock for consumers."
"But we also recognize that federal law demands that we provide consumers with important rights and protections to review and potentially dispute their payment records," added Zurawski, who said the company would continue working with the CFPB on the issue.
Using alternative data "is a good first step," said Terry Clemans, executive director of the National Consumer Reporting Association, a trade association for companies that provide financial data to mortgage lenders and rental property managers.
However, some potential financial data sources, such as transactions at buy-here, pay-here used car outlets, would likely be difficult to incorporate into the national credit rating system, said Clemans.