The CFPB recently released a report that documents the results of a research project undertaken by the CFPB’s Office of Research to better understand the demographic characteristics of consumers without traditional credit reports or credit scores. The Report concludes that the current credit reporting system is precluding certain populations from accessing credit and taking advantage of other economic opportunities. Although the CFPB does not use the term “disparate impact”, the fair lending implications of the Report should be carefully considered by both the providers and users of credit reports and credit scores.
The CFPB press release highlighted four of the findings from the Report:
- 26 million consumers (11% of U.S. adults) are “credit invisible” (i.e., they do not have a credit file with any of the three nationwide credit reporting agencies: Equifax, Experian, and TransUnion).
- 19 million consumers (8% of U.S. adults) have “unscored” credit records (i.e., they have insufficient credit history to generate a credit score).
- Consumers in low-income neighborhoods are more likely to be credit invisible or to have an unscored record.
- Black and Hispanic consumers are more likely to have limited credit records.
Although the Report does not include any recommendations for the industry on how to address the Report’s findings, during a press call hosted by the CFPB prior to the release of the report, Kenneth Brevoort of the CFPB’s Office of Research noted that the CFPB will be working on the development of potential fixes to the problem either through regulatory actions or encouraging industry initiatives. The CFPB should be cautious about taking any regulatory actions that undermine existing industry efforts to serve populations not currently being served by traditional credit reports or credit scores.
The Report notes that several industry participants have already developed scoring products that are aimed specifically at these populations. As demonstrated in congressional testimony last year by Stuart Pratt, President and CEO of the Consumer Data Industry Association (CDIA), the trade association for the consumer reporting industry, “CDIA’s members are at the forefront of this movement and it is private investment which is expanding the data sets available for lenders to use as they reach new communities of consumers. These data ensure expanded fairness and access.”
If the CFPB is suggesting that there need to be additional sources of alternative credit reports and credit scores, these new products and services must be developed carefully to ensure the reliability of any predictions; otherwise, the potential harm could be felt across all relevant stakeholders, from businesses that make decisions with inaccurate information and consumers that are impacted by those decisions.
In prepared remarks, CFPB Director Richard Cordray acknowledged that, “Without credit reporting and credit scoring, it would be harder for financial service providers to assess and manage credit risk, and the supply of credit would be more expensive, more erratic, and more constrained.” The CFPB should be wary of any actions that could disrupt the U.S. credit reporting system, which the Report observes is currently serving 189 million American consumers.