Director Kraninger's Remarks During the November 2020 Academic Research Council Meeting
Good afternoon. My thanks to you all for joining today and taking the time to provide us with your valuable insights. We have a lot to talk about but first I’d like to extend my appreciation and thanks to Joshua Wright for his dedication and commitment in serving as chair.
Your contributions as Academic Research Council members provide important feedback with respect to our strategic research planning process and agenda. You help us dig deep into real data about what is happening in the marketplace so that we can prioritize, make better policy decisions, and, generally, better serve consumers. So, again, I’d like to thank everyone here for their contributions.
Our agenda today focuses on small business lending data and research, the accuracy of credit reporting, and the use of alternative credit data. Let me briefly touch on each one.
First on the agenda will be an update on our small business lending rulemaking, something to which I know you all have been paying close attention. The panel will also focus on what efforts the Bureau could currently be making to better understand the market for small business credit.
A year ago this month, the Bureau held a symposium to focus on the current state of the small business financing market and how best to implement Section 1071 of Dodd-Frank, which directs the Bureau to develop a small business lending data collection rule. We wanted to explore how to efficiently meet our statutory mandate without imposing unnecessary or undue costs that could limit access to credit.
Simply put, the more than 27 million small businesses in this country need access to credit to smooth out cash flows and make entrepreneurial investments. To get that financing, they have many different options.
With Section 1071, Congress intended to improve the general understanding of the small business lending environment. Section 1071 amended the Equal Credit Opportunity Act to require financial institutions to compile, maintain, and submit to the Bureau certain information concerning credit applications by women-owned, minority-owned, and small businesses. The stated purpose is to “facilitate enforcement of fair lending laws” and to “enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.”
Given the importance of small business finance to the health of our economy and to local communities, this rule needs to be done with great care and consideration. So last year’s symposium was aimed at stimulating a proactive and transparent dialogue around these issues. After we took all the valuable feedback from that forum, just last month we took a major step in the rulemaking process by convening a panel under the Small Business Regulatory Enforcement Fairness Act (also known as SBREFA). The SBREFA panel discussed our outline of proposals under consideration, which was released in September, with representatives of small entities likely to be directly affected by the eventual 1071 rule. We’ve invited all stakeholders to provide written feedback on the SBREFA outline by December 14 and look forward to hearing what you have to say.
The Bureau’s Section 1071 rulemaking effort highlights the value of research on the small business lending market. At the Bureau, our Office of Research and our team in Small Business Lending Markets monitor and study the credit market for small businesses. Today our discussion will focus on how the Bureau can learn more about the small business lending market and small business owners as consumers using existing Bureau data assets or other sources of data on small business lending.
The second item on our agenda is our research on the accuracy of credit reporting.
Credit reporting plays a key role in the lives of consumers and the health of the U.S. economy. The information from consumer reports is used to make many kinds of important decisions – including whether a consumer will be able to borrow money and how much he will pay in interest to finance a home, a car, or a higher education. Consumer reporting information is also commonly used for other purposes, beyond credit, such as to screen for employment or for rental housing, and to protect life and property through insurance.
Most Americans have a credit file. In fact, each of the three biggest credit reporting companies maintains files on more than 200 million consumers. They compile consumer credit profiles based on information supplied by thousands of data furnishers. And the amount of data collected and exchanged in the credit reporting industry is astounding. Each year, billions of updates are made to credit files.
Assuring that such personal financial information is updated timely and accurately, and that it is maintained securely, is a critical responsibility of credit reporting companies. Inaccurate credit reporting can affect a consumer’s credit score. It can lead to arbitrarily different credit scores among consumers with similar credit practices and histories.
And it can force consumers to make a choice between spending time and money to correct the information or just bearing the costs of the inaccuracies. All of this is exacerbated by the fact that consumers have very little control over what information is included in their credit reports and how that information influences their credit score – it is typically in the hands of the furnishers and credit reporting companies.
A 2012 Federal Trade Commission study assessed accuracy in credit reporting and the dispute processes of credit reporting companies, where consumers could request that reported information be reviewed and potentially corrected. The study found that a quarter of participants believed their reports were inaccurate and that 70 percent still believed the data was inaccurate even after they lodged a dispute.
As the first federal regulator with supervisory authority over the consumer reporting market, the Bureau takes findings like this very seriously. Indeed, we have given consumer reporting oversight a high priority and have devoted significant resources to that end.
Our presentation today will first lay out the existing scholarship on credit reporting problems associated with inaccurate data. Given the strengths and weaknesses of available research to better understand the issues consumers face today, the presenters will ask about different directions for new research to help fill gaps toward new policymaking. We want your feedback on what more can be done to better understand the problems. For example, we want to hear from you about questions such as: Should we randomly sample furnished data to assess accuracy and correctness? What are the policy-relevant areas that new research should inform? What are the key outcomes of interest in a new study? What are the data and methods that can bring the most robust evidence? I am sure you will have great feedback into these questions and more.
And finally, today we will share our research on the use of alternative credit data.
“Alt data” are the types of data not found in traditional credit scoring. Some of the examples include rent and utility payments, employment history, and cash-flow information. In recent years, an increasing number of financial institutions, especially fintechs, have been using alternative data to make credit and pricing decisions. Understanding how such information affects consumers in credit markets has important policy implications.
Prevalent use of alt data holds the promise of potentially significant benefits for some consumers, like extending credit more quickly, but may present certain risks for others. For example, if the data used in credit and pricing decisions become more complex, and they are fed into more complex models, it could become difficult for some consumers and even financial institutions to understand how credit and pricing decisions are made.
The Bureau’s research indicates that traditional credit scoring has left some critical gaps in certain consumers’ access to credit. For example, in 2010, 26 million people—or about 11 percent of the 235 million U.S. adults—were identified as “credit invisible,” meaning that they had no file with the major credit bureaus. Another 19 million, or 8.3 percent of the adult population, were “unscorable” because their credit file was either too thin or too stale to generate a reliable score from one of the major credit scoring firms. Consumers like these likely face challenges accessing well-priced credit.
The Bureau wants to learn more about these current and future market developments. We want to learn how market participants are or could be mitigating certain risks to consumers, and about consumer preferences, views, and concerns. Today we want your feedback on lots of specific questions, including: What are the most important questions to answer when it comes to alternative data? What types of privacy concerns should we be considering in our research? Do you have any guidance on how to assess the use of alternative data on access to credit?
As members of the Bureau’s Academic Research Council, your feedback and insights help us protect consumers in the financial marketplace and contribute greatly toward helping us prevent harm where we can. I especially want to thank you for going above and beyond during the pandemic, when we’ve all worked hard to pivot to help consumers as quickly as possible. You are nimble and helpful and consumers are grateful to have you in their corner. I look forward to this afternoon’s discussion on how we can continue that work.
I would like to end by reminding everyone that in mid-January, we will open the application window for vacancies across the advisory committees. We are looking for experts to advise on a broad range of consumer financial issues and emerging market trends. So, please, spread the word. Thank you.