There are more than 50 million Americans without a traditional credit score and 80 million unbanked and under-banked individuals in the United States. These individuals, more often than not, do not have access to traditional credit products.
We recently attended the Money2020 conference in Las Vegas, where the Consumer Financial Protection Bureau released a report encouraging the use of non-traditional information and methods to enable better credit scoring and analysis for this large group. We applaud their efforts.
The CFPB launched Project Catalyst in 2012 to promote consumer-friendly innovation. Since its creation, the agency has collaborated with several FinTech companies, including BillGuard (analyzed consumer complaints and complaint resolution patterns), Simple (analyzed consumer spending behavior) and Banking Up (analyzed consumer response to immediate fund availability).
This most recent report from the CFPB recognized that there are a number of companies now focused on improving credit assessment, which, if successful, would have a tremendous impact on access to credit for the unbanked and under-banked population. Providing individuals with the ability to give access to their social media data and other information (e.g. access to bank account data) in order to build a better credit score is an intriguing concept. There will undoubtedly be much attention by regulators on the use of this non-traditional data.
The need for this type of innovation in the market is acute. I recently read that 63% of Americans do not have enough savings to cover a $500 emergency or unexpected expense. While I acknowledge that a government agency rarely, if ever, is an agent for change, I applaud the CFPB’s most recent release on this topic, which ended with the following quote from Franklin Deleano Roosevelt:
“It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something.”
I agree and look forward to new, innovative techniques in consumer credit scoring that lead to improved access to responsible financial products for all Americans.
The effect of the 2016 election on the CFPB
The Trump administration’s (with a Republican controlled Congress) impact on the CFPB has been a topic of much speculation. The President-elect has stated that he intends to walk back Dodd Frank, from which the CFPB was born.
The U.S. Court of Appeals for the District of Columbia has already set in the motion potential changes to the leadership structure as well as limitations to the power of the CFPB. The court found the ability to only remove the director of the bureau from his post ‘for cause’ as unconstitutional. The October 11, 2016 ruling struck the ‘for cause’ portion of the law and held that the director of the CFPB had too much unilateral, unchecked power.
As a result, Trump could remove the current director without cause and replace him with a candidate of his own choosing. The CFPB does have the ability to appeal the decision, but I think a change in leadership at the bureau is likely to happen. Either Trump will remove the current director, Richard Cordray, or, Cordray will (as has been rumored) voluntarily resign and run for governor in his home state of Ohio. A change in leadership at the CFPB seems likely.
The DC court also severely limited the ability of the CFPB to retroactively penalize when re-interpreting rules as well as upheld a three year statute of limitations to CFPB enforcement actions, finding that such retroactive application and the agencies stance that it had unlimited time to bring an action both disregarded due process.
These common sense checks and balances to the CFPB’s power make sense. I have heard coherent arguments from both sides – those that believe the CFPB is needed to ‘make consumer financial markets work for consumers’ as well as those that believe the CFPB has limited the availability of credit to many hardworking Americans.
Let’s hope that innovation in credit scoring, driven by the financial technology market, will provide a solution and improve consumer access to credit.
What do you think? Please leave your thoughts and comments below.