CFPB Explores Impact of Alternative Data on Credit Access for Consumers Who Are Credit Invisible
"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
The Bureau estimates that 26 million Americans are credit invisible, meaning they have no credit history with a nationwide consumer reporting agency. Another 19 million consumers have a credit history that has gone stale, or is insufficient to produce a credit score under most scoring models. A credit score is drawn from a consumer's credit report. A credit report may reflect if payments are made on time, what debt a consumer owes, and whether they have a debt or bill in collection. Credit reports can also include records such as liens, judgments, and bankruptcies, which can provide insight into a consumer's financial status and obligations.
Typically, a credit score predicts the likelihood the consumer will repay a debt as agreed. A mathematical formula - the scoring model - is used to create the credit score based on payment record, amount of debts, and other factors. Each has a certain weight, and a credit score is calculated from this formula. A higher score usually makes it easier for a borrower to qualify for a loan and may garner a better interest rate. Most credit scores range from 300-850. Different lenders may use different scoring models, so a consumer's credit score can vary from lender to lender.
Without a sufficient credit history, consumers face barriers to accessing credit, or pay more for credit. This problem disproportionately impacts consumers who are Black or Hispanic, and people who live in low-income neighborhoods. It also impacts some recent immigrants, young people just getting started, or people who are recently widowed or divorced who don't have enough credit history on their own. Underserved consumers often resort to high-cost loans that aren't reported to credit reporting agencies, which may not help build a credit history.
For some consumers, the use of unconventional sources of information, called "alternative data," may be a way to gain access to credit to build a credit history. Alternative data draws from sources such as bill payments for mobile phones and rent, and electronic transactions such as deposits, withdrawals or transfers. This information could show a track record of meeting obligations that may not turn up in a credit history. As a result, some who now cannot get reasonably priced credit may see more access or lower borrowing costs. The Bureau is also exploring risks posed by alternative data that is inconsistent, incomplete, incorrect, overgeneralized, or biased. Such flaws could adversely affect credit access for low-income and underserved populations, or others. The
* Access to credit: The
* Complexity of the process: The
* Impact on costs and service: The
* Implications for privacy and security: The
* Impact on specific groups: The
The CFPB Request for Information can be found here: http://files.consumerfinance.gov/f/documents/20170214_cfpb_Alt-Data-RFI.pdf
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