Earlier this month, the Consumer Financial Protection Bureau issued its 2018 Fair Lending Report to Congress. The report summarizes the bureau’s 2018 efforts to ensure “fair, equitable, and nondiscriminatory access to credit for both individuals and communities” as mandated by the Dodd-Frank Act.
Among other topics, the report addressed the issue of “credit invisibility,” situations where consumers seeking credit for the first time are unable to be scored because they have no traditional credit data points. In the past, the CFPB has reported that roughly 20 percent of the adult population have little or no credit records with the three nationwide credit reporting agencies.
As a result, these “credit invisible” and “unscorable” consumers are unable to fully participate in the credit marketplace. The bureau pointed out that this situation can “limit their ability to withstand financial shocks and achieve financial stability.”
In September 2018, the bureau convened its first fair lending symposium to address the issue of access to credit, which included “hundreds of stakeholders from industry, government, think tanks, academia, and consumer advocacy and civil rights organizations.” Panelists discussed strategies and policies that improve access to credit. The report summarizes the observations of the symposium.
Also, in 2018 the bureau created the Office of Innovation designed to help fulfill its statutory mandate to promote competition, innovation, and consumer access within financial services.
One aspect of innovation that the report focuses on is alternative scoring models. These might enable wise underwriting decisions that steer clear of disparate impact implications in which underwriters approve members of protected classes proportionately less. The report discusses conducting supervisory reviews of alternative credit scoring models, noting that the “use of alternative data and modeling techniques may expand access to credit or lower credit cost.”
In 2018, the CFPB recommended supervisory reviews of third-party scoring models that would “focus on obtaining information about the models and compliance systems of third-party scoring companies for the purpose of assessing fair lending risks to consumers and whether the models are likely to increase access to credit.”
The bureau said that while a significant focus of its interest is on how alternative data and modeling can expand credit access for credit invisibles, it is also interested in other potential direct or indirect benefits to consumers, “including enhanced creditworthiness predictions, more timely information about a consumer, lower costs, and operational improvements.”