Welcome to this meeting of the Community Bank Advisory Council. We created this Council almost five years ago because we wanted to ensure that we have a consistent way to hear directly from Community banks about what they are seeing and hearing in their communities and about how our work is affecting their businesses. We do not supervise banks with $10 billion or less in assets—which means that we do not conduct examinations on any community banks—yet we know that the regulations we write can directly impact these institution. The Advisory Council fills the gap in our day-to-day contact and helps to ensure that the lines of communication remain open at all times. We have found over the years that the more perspective and information we have about small financial institutions like community banks and their customers’ experience in the consumer financial marketplace, the better we will be able to protect consumers in the financial marketplace.
We value the dialogue we have with our CBAC members, whose perspectives and information influence our thinking. We talk to them about our regulatory agenda and they consistently provide essential feedback that helps us understand how their institutions operate. All of that improves our work in many ways; and, I hope, demonstrates that here at the Consumer Bureau, we are eager to listen and deepen our understanding.
Since 2011, I have led the Research, Markets, and Regulations Division and for the last year have also served in the role of Acting Deputy Director. The division is responsible for articulating a research-driven, evidence-based perspective on consumer financial markets, consumer behavior, and regulations; informing Bureau thinking on priority areas; identifying areas where Bureau intervention may improve market outcomes; and supporting efforts to reduce outdated, unnecessary, or unduly burdensome regulations.
Today, I want to highlight some of the work the Bureau is doing with respect to innovation in the consumer financial marketplace—and specifically on our work involving the use of data in the financial marketplace—in hopes of obtaining feedback from this council. From early on, the Bureau has made it a priority to engage on the topic of financial innovation which in today’s world typically involves technological innovation. I know and appreciate that such innovation may be both a challenge and growth opportunity for community banks, and so I particularly look forward to the discussion.
One area of interest to us is the way in which transactional data is being accessed and utilized in the financial marketplace. We see dramatic changes which hold the potential to improve the way consumers manage money and direct their financial affairs,
Many of these innovations rely on access to current information drawn from the assets, balances, and transactions in people’s financial accounts. These include savings and checking accounts and, for those who have them, investment, mortgage, credit card, auto loan, or student loan accounts. In each case, by helping consumers budget or obtain credit, the information recorded about them can be a valuable asset. Indeed, it may matter as much as the dollars they actually have in their accounts at any given time.
These changes have not been without risk to consumers or to their financial institutions. So we want to understand how consumers and third parties are accessing and using such data, and how it fuels new innovations. We also are deeply interested in how consumers are exercising control over their personal financial data, including the data that is maintained by their financial institutions.
In November, we issued a Request for Information to inquire about the challenges consumers face in accessing, using, and securely sharing their financial records and about the impacts on financial institutions when consumers access this data through third parties. We are working to assess whether barriers exist between consumers and the personal data that their financial providers maintain about them. And we want to hear solutions from stakeholders that can help address the risks and technological challenges posed when consumers seek ready access to this data and seek to share it electronically with third parties. We are keenly aware of the serious issues around privacy and security, for consumers and providers alike.
One pressing issue is how to satisfy the demands of consumers without exposing the providers that maintain this data to undue costs and risks. Another pressing issue is how to prevent consumers from subjecting themselves to undue risks, including the possibility that their data could be misused.
Over the past few months, we have received about 70 comments from financial institutions, data aggregators, companies that use aggregated data, trade associations, consumer groups, and individuals. We are sifting through the comments, which are extensive and thoughtful. They present a wide range of ideas about how best to achieve the broad goals we have in mind.
Certain perspectives presented in the comments are not surprising. Banks and other financial companies raise concerns about consumer data security and offer solutions that may address those concerns. Aggregators and users of the data, by contrast, are recommending less fettered access and greater freedom to store and use the data that consumers permit them to collect. This would give them more flexibility to enhance their services and their business models. Almost everyone is offering arguments that their approach will better protect the interests of consumers. At stake is how consumers can control what data is shared, and whether security or other concerns should restrict how it is shared, with whom, how often, and for what purposes.
So there is much to digest, and we see the market moving quickly, with high stakes for all involved. Even as we speak, vigorous and spirited negotiations are underway throughout the industry that could shape the future of information access. We expect the interests of consumers to be at the forefront of these discussions. We are therefore concerned about reports of some institutions that may be limiting or restricting access unduly. In today’s meeting, we are particularly interested in how Community banks help your customers access their data and how you are impacted by data aggregators accessing data on behalf of your customers.
I also want to update you and seek your input on our latest actions to explore the use of new types of data in assessing the creditworthiness of consumers applying for credit. As you no doubt know, over a period of decades large portions of the financial services industry have become dependent on automated underwriting systems to make their credit decisions. These underwriting systems in turn are dependent upon the data that is maintained by the national credit reporting agencies and that fuels the credit scoring models with which we are all familiar. This creates a catch 22: consumers who lack a credit report are largely shut out of the mainstream credit system and deprived of the opportunity to build a credit history.
Some have suggested that the thoughtful and responsible use of alternative data—that is, data that is not part of the traditional credit reporting system—could expand the credit available to underserved consumers. If it is possible to expand opportunity in this manner, it would benefit not only these consumers, but perhaps would buoy the economy in ways that benefit us all.
So in February we launched an initiative to learn more about issues raised by this alternative data as well as by new methods of analyzing and using the data. In particular, we issued a Request for Information to obtain feedback from stakeholders about the potential benefits and risks of using, applying, and analyzing unconventional sources of information to assess people’s creditworthiness. We want to know whether various types of this so-called “alternative data” can help more consumers build their credit histories and gain more access to credit.
Just what consumers are we talking about here? As a self-described “data-driven agency,” naturally the Consumer Bureau has dug into the data to gain a deeper understanding. After crunching the numbers, we estimate that 26 million Americans are “credit invisible,” meaning they have no credit history at all. Another 19 million people have credit histories that, under most models, are too limited or have been inactive for too long to generate a reliable credit score.
That means about 45 million adults nationwide fall into these two categories. For every one of them, managing the ways and means of their lives usually costs more, risks more, takes longer, and does less to build their financial futures than is true for most consumers. That is simply a tragedy in a modern economy and a modern financial system like ours, and we all need to think harder about what we can do to address it. Certain longstanding products, such as secured credit cards, can provide part of the answer and should be actively offered to these consumers. But we also want to explore ways to enable these consumers to obtain responsible and affordable credit when they need it. That is where alternative data holds promise.
For example, alternative data may draw from sources such as rent or utility or telecommunications payments, which in general have not been traditionally included in assessments of creditworthiness. It may draw from electronic or other records of transactions, such as deposits, withdrawals, or account transfers. And it may include other personal information, such as data generated from the use of mobile phones or Internet services. The idea is that by filling in more details of a consumer’s financial life, this information may paint a fuller and more accurate picture of their creditworthiness. So adding alternative data into the mix may make it possible to open up more affordable credit for millions of additional consumers.
Through the Request for Information issued last month, we are looking at the pros and cons of using the types of alternative data available today, and what the future may hold as technologies continue to evolve. We are looking at how this information is gathered and analyzed so we can better understand how all of this is beginning to unfold.
For many of you, all of this may seem quite odd. After all, community banks have long prided themselves—and justifiably so—for their willingness to go beyond the numbers, to understand their customers’ life circumstances, and to make lending decisions based on the totality of the information available to you. In many ways what we are exploring is whether there are opportunities to combine the objectivity and rigor of automated underwriting with the community banks’ understanding that good understanding requires more than simply looking at a consumer’s past or current use of mainstream credit.
Some of the main inquiries we posed are these. First, can the use of alternative data to create or augment individual credit scores increase access to credit for consumers by helping lenders better assess their creditworthiness? Second, will this lead to more complex lending decisions for both industry and consumers, and what risks would that pose? Third, how might the use of alternative data, new modes of analysis, and new technologies affect costs and services in the making of credit decisions? Certainly it could mean a faster application process, lower operating costs for lenders, and lower loan costs for borrowers, all of which could benefit consumers. Fourth, what forms of alternative data might be prone to errors, and how hard will it be for consumers to identify such errors and get them corrected? Finally, and quite significantly, how may the use of alternative data affect certain groups in ways that might run afoul of the fair lending laws or create other risks for vulnerable consumers?
We are hearing from innovators who want to expand access to credit or offer credit at lower interest rates to borrowers whose credit scores may understate their ability and willingness to repay. And we see promise in some consumer-friendly innovations that bring new products to the unbanked and underbanked. These approaches also pose risks, and we want to know more about these risks and how they can be mitigated or minimized. On the whole, we are encouraged by the potential for using alternative data in underwriting to benefit the very consumers that the fair lending laws are designed to protect.
So, as we think hard about these issues, we welcome you as members of our advisory council to also provide feedback and be a part of the frank and wide-ranging discussion we have begun on this subject so that you can further inform our approach. We are eager to hear your experiences and perspectives today. Thank you.
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.