Earlier this week, the CFPB’s Office of Research released its third “Data Point” report on Americans who are “credit invisible” – that is, those without an established credit history with the three national credit reporting agencies – and who therefore cannot be scored by most traditional credit scoring models. The report, entitled “The Geography of Credit Invisibility,” focuses on the geographic concentrations of credit invisible consumers, to determine whether there are “credit deserts” in which access to credit is largely absent, leading to consumers in those areas being unable to become “credit visible” by establishing a credit history.
The report makes a number of interesting observations about the incidence of credit invisibility, focusing on adults over the age of 25 (because, according to the report, most Americans succeed in transitioning into credit visibility between the ages of 18 and 25, typically through credit cards or student loans). Some of those observations are:
- The report indicates that credit invisible consumers are concentrated in two types of geographies: in core urban areas (as opposed to suburban areas), and in rural or small-town areas.
- Rural and small-town areas have the highest proportional incidence of credit invisibility, but because of the higher populations in urban areas, about 2/3 of credit invisible adults over age 25 reside in those areas.
- The report provides data showing that average income level in a neighborhood is correlated with credit invisibility in urban areas, but this link between income and invisibility is absent in rural areas.
- Because many consumers use credit cards as an “entry” product that makes them credit “visible,” the report presents data about the use of credit cards by consumers in various types of areas, and by income level. In urban and suburban areas, the use of credit cards is higher as an “entry” product, and the use of credit cards increases with income level. In rural and small-town areas, the use of credit cards is lower, and does not increase significantly with income level.
- Testing the hypothesis that proximity of traditional banking services may be a factor in credit invisibility, the report then examines data showing the use of credit cards as an “entry” product, sorted by the distance to the nearest bank branch. The report highlights that proximity to a bank branch is somewhat correlated with higher credit card usage as an “entry” product in urban and suburban areas, but there is no such correlation in rural areas.
- Based on this data, the report observes that “[t]hese results provide little evidence that bank branch proximity is an important factor in explaining why consumers are credit invisible.” In fact, the report goes on to note that branch proximity is not one of the more common reasons why consumers say that they do not have a bank account. More common reasons provided are not having enough money to put in a bank account, and a distrust of banks.
- The report also contains data demonstrating a relationship between the availability of high-speed internet service and credit invisibility, showing that areas with less availability of internet service have significantly higher rates of credit invisibility. The report notes that credit cards, a typical “entry” product for credit invisible consumers, are typically marketed and offered online, suggesting a potential causal link between internet access and the ability to obtain a credit card.
The report does not make any policy recommendations about the subject of credit invisibility, and does not present the issue as a fair lending concern – there is no data correlating credit invisibility with any protected status under the Equal Credit Opportunity Act. What, then, should we make of the report, and its implications for the CFPB’s future activities with respect to making credit more widely available to “invisible” consumers?
My guess is that the report will be used to support efforts to use innovation to increase access to credit for invisible consumers. A few policy conclusions that could be drawn from the report include the following:
- The CFPB should encourage alternative scoring models that enable underwriting decisions to be made with respect to “invisible” consumers, and should refrain from heavy-handed application of the disparate impact theory with respect to such models. (That theory could, theoretically, be used to attack scoring models that approve members of protected classes proportionately less, but the business justification of the model’s ability to predict repayment performance should cause the Bureau to refrain from asserting it in this context).
- The report may suggest that models based on consumers’ internet activity may be ineffective in making credit available to consumers in areas with little internet access.
- Because the use of mobile devices is not dependent on the kind of high-speed home internet access the report shows to be correlated with higher rates of credit invisibility, this would suggest that the CFPB should encourage financial institutions to make products more available/accessible through mobile devices (using mobile-optimized web pages or mobile apps). This would, optimally, involve providing realistic guidance to financial institutions about how to make disclosures and obtain necessary consents through mobile devices in ways that do not deter consumers because of their cumbersome nature.
- The report may suggest that the Bureau’s education efforts with respect to access to credit should be concentrated in core urban and rural/small town areas.
- Finally, the report suggests that the problem of credit invisibility could be addressed in urban areas by products tailored to low-income consumers, and this in turn would indicate that the CFPB should encourage financial institutions to offer such products, again without heavy-handed application of “reverse redlining” theories under the Equal Credit Opportunity Act for financing sources who offer such products. This same data point would also support the Bureau’s effort to revise its small-dollar lending rule, to prevent small-dollar loans from being extinguished as an “entry” product for credit visibility. (The report does not address this at all, since it relies on credit cards as the most common “entry” product to the three national credit reporting agencies. However, there is credit reporting on small-dollar loans through specialty credit bureaus, and data on these credit interactions could be used to qualify consumers for other credit products).
We certainly hope that the Bureau uses the data in this report to guide its policy decisions in a direction that will make credit more available for “credit invisible” Americans.