Welcome to this meeting of the Credit Union Advisory Council. We created the Credit Union Advisory Council almost five years ago because we wanted to ensure that we have a consistent way to hear directly from credit unions about what they are seeing and hearing in their communities. We generally do not supervise credit unions with $10 billion or less in assets—which means that we do not conduct examinations on any except a handful of the largest credit unions—the Advisory Council fills this gap in our day-to-day contact and helps to ensure that the lines of communication remain open at all times. So, we have found over the years that the more perspective we have about our advisory council members’ experience in the consumer financial marketplace, the better we will be able to figure out what, if anything, we should be doing in response.
We have found great value in the dialogue we have with our CUAC 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 willing to listen and take on board feedback. Today, before we hear from Bureau subject matter experts in more detail, I want to talk to you specifically about some of the work we are doing and specifically some of the explorations we have recently announced about the role of innovation in the consumer financial marketplace.
From early on, the Bureau has made it a priority to engage with financial innovators. I know and appreciate that innovation is not an unfamiliar topic to credit unions. Innovation presents great opportunities for credit unions to provide access to financial services and serve their members; it can also be a challenge and a growth area for smaller financial institutions. Through their cooperative model, many credit unions and service organizations are able to create efficiencies and share services to create new pathways for innovation. For some of our credit union advisory council members, issues like consideration of alternative data and information largely reflect their more customer-centric approach to serving their members daily and being responsive to their members’ particularized needs, which are not anything particularly new or innovative for them.
Utilization of data in the financial marketplace is rapidly evolving. Many of these developments are changing and improving the way consumers manage money and direct their financial affairs, but they have not been without risk to consumers. So we want to understand how consumers and third parties are accessing and using that 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.
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 them 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.
In November, we issued a Request for Information to inquire about the challenges consumers face in accessing, using, and securely sharing their financial records. We seek to identify 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 by consumers who want to have ready access to this data and 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. Yet we remain concerned about reports of some institutions that may be limiting or restricting access unduly. In today’s meeting, we are particularly interested in how credit unions utilize alternative data and how your members access their financial information.
For our part, the Consumer Bureau will continue to analyze these issues and closely follow developments. We will take action as needed to make sure that consumers can safely access and share information about their financial lives, that providers and aggregators act in accordance with their instructions, and that financial institutions’ legitimate interests are appropriately protected. We recognize that data access makes it possible to realize the many benefits of competition and innovation. We will be drawing heavily on the technological expertise and insight of the various stakeholders, and we will test their arguments and explanations directly against one another. Above all, we will insist that the consumer is the focus, not the football, as this process unfolds. So we look forward to further productive engagement with all parties to find solutions that will put consumer interests first.
I also want to update you on our latest actions to encourage the use of new types of data that can open up credit opportunities for more consumers. Computer-enabled data analysis, for example, has the potential to provide greater insights into the financial patterns of the underserved – their inflows and outflows, and the ways they manage the gaps. Thoughtful and responsible use of financial data about individuals 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 last month we launched an initiative to learn more about issues raised by new technologies and new uses of data. In particular, we issued a Request for Information 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.
As many of you are well aware, alternative data may draw from sources such as rent or utility 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 might include other personal information, such as rent or utility payments, or 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 in the underwriting models now used by credit union, banks and other financial companies, including the fintech companies. And we are seeking to better understand how all of this is beginning to unfold.
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 or behaviors 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 those who had been locked out or underserved by the banking system and existing credit models. 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 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. We are eager to hear your experiences and perspectives today.
We will continue to engage with you and others to work through these issues. So we look forward to hearing from the Credit Union Advisory Council members to further inform our approach. As we want to make clear, everyone who provides consumers with financial products and services must adhere to the same standards and be held accountable under the law. So as we move forward, we will have one eye on protecting consumers and the other on encouraging innovations to improve their lives. As is always the case, the long-term interests of your businesses depend on delivering great value and customer service. In these ways, our goals intersect. As always, we are thinking hard about these issues and we are open to your suggestions. Thank you.
The Consumer Financial Protection Bureau (CFPB) 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 www.consumerfinance.gov.