Report to the President, the Senate Committee on Banking, Housing, and Urban Affairs, and the House of Representatives Committee on Financial Services
Each year, consumers in the United States send tens of billions of dollars to family members, friends, businesses, and others abroad. Much of this money is sent through remittance transfers, which are certain electronic transfers from U.S. senders to recipients in foreign countries. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires the Consumer Financial Protection Bureau (CFPB) to issue a report on two topics related to remittance transfers: (1) the transparency and disclosure to consumers of exchange rates used in remittance transfers; and (2) the potential for using remittance histories to enhance the credit scores of consumers.
The first topic relates to the cost to consumers of remittance transfers. Exchange rates are a key factor in determining the amount a remittance recipient receives and the price a remittance sender pays for a transfer. Exchange rates can also be a key factor in how consumers choose among remittance transfer providers. Thus, exchange rate information has the potential to educate consumers, empower them to compare remittance products, and facilitate competition among providers.
Consumers will soon have new ways to learn about exchange rates. The Dodd-Frank Act establishes new remittance disclosure standards. For most remittance transfers, the Act requires disclosures that list the exchange rate used, as well as the amount of currency that will be received abroad, and other information.
The CFPB recommends four principles for maximizing consumers’ ability to receive and use exchange rate information: (1) design, test, and use disclosures to maximize consumer comprehension; (2) facilitate consumers’ comparisons of remittance offerings; (3) adapt disclosures to the growing variety of channels that consumers use to initiate remittance transfers; and (4) couple information about exchange rates with an indication or estimate of the combined effects of fees and the exchange rate.
Implementation of the Dodd-Frank Act’s requirements will shed light on any need for additional exchange rate transparency measures. The CFPB also recommends that any such measures be evaluated and considered together with the range of mechanisms for benefiting and protecting remittance consumers.
The second topic addressed in this report is the potential use of remittance transfer data in credit scoring. Credit scores are measures of credit risk that can affect consumers’ access to credit and housing, among other things. The scores are generally based on information contained in consumer credit files at one of the three nationwide credit reporting agencies (CRAs). In the past, credit files have not routinely included remittance data. Thus, if remittance histories can help assess or predict the credit risk that consumers pose to lenders, adding such data to credit files could produce a change in the credit scores of some remittance senders. If remittance histories are predictive of credit risk, the addition of remittance data might also allow credit scores to be generated about some consumers who were otherwise unscorable.
Inclusion of remittance data in credit scores could have positive consequences for some consumers born outside of the United States, who are more likely than others to make certain types of remittance transfers. Earlier research suggests that certain foreign-born individuals may be disproportionately likely to have credit histories that are insufficient to generate credit scores. For other foreign-born consumers, limited credit files may overestimate the credit risk they pose to lenders.
Whether and how remittance data might affect the credit scores of individual consumers would depend, however, on a number of factors, including the predictiveness of remittance histories, the particular scoring and business models developed to use remittance data, and the data already in individuals’ credit files. If remittance data can help predict credit risk, in some cases, that data might produce an increase in credit scores or permit the generation of credit scores for previously unscorable consumers; in other cases, credit scores might remain the same or decrease.
Willingness on the part of market participants – remittance transfer providers, CRAs, credit score developers, and lenders – to provide remittance histories and use them in credit scores will depend on the incentives and challenges that each would face. Likely business challenges include the size of the market for remittance-based scores, and the investments required to record and analyze remittance data accurately. Use of remittance histories in credit scores could also require investments and changes in business processes to ensure compliance with privacy, credit reporting, and fair lending laws.
For all market participants, a critical question will likely be the extent to which remittance histories can improve the predictiveness of credit scores, or be used to generate reliable first-time credit scores. In addition to discussing the incentives for and challenges of using remittance data in credit scores, this report describes planned CFPB research that will assess the predictiveness that remittance histories might add to credit scores. This report is based on the CFPB’s review of existing information and interviews of market participants, researchers, and other industry experts. Part I provides background on the remittance transfer market, including information about consumer demand, providers, products, and consumers’ shopping and purchase behavior. Part II provides recommendations on the disclosure of exchange rates. Part III discusses whether and how remittance histories might be used to enhance credit scores of remittance senders, the potential barriers to such use, and the CFPB’s planned research regarding remittance histories and credit scores.