I am glad to be with you today to hear firsthand about the latest innovations in consumer financial services. These innovations seem to be generating considerable interest and optimism about the future. They are driving new services for consumers and transforming how they conduct their finances. At the Consumer Financial Protection Bureau, we want to help channel these cutting-edge approaches in positive directions. Our goal is to put consumers first and provide them with more tools to take control of their financial lives. And we want you to share this vision as well.
As many of you know, the Consumer Bureau is the single federal agency with the sole mission of protecting consumers in the financial marketplace. This includes monitoring the rapid changes that new technologies are spurring in transactions, lending, underwriting, and money management, among other things. As we track how these changes evolve, we will be keeping consumers top of mind as this all plays out.
My remarks will focus on three broad areas of special interest to the Bureau. First, our Project Catalyst initiative is familiar to many of you, yet I will begin by describing the approach we take to encouraging consumer-friendly innovations in consumer finance. Second, we are carefully considering the issue of consumer control over their personal financial data. Third, we are looking into the benefits and risks of using unconventional sources of data to underwrite loans as a way to open access to credit for more consumers.
In general, however, I will note two overarching principles that the Bureau seeks to uphold in all these areas. First, we believe in a level playing field for all providers of consumer financial products and services. Evenhanded oversight of all providers – whether they are large banks or fintech startups – is a basic rule of the road for effective regulation of the financial marketplace. Nobody gets a free pass to exploit regulatory arbitrage; everyone must be held to the same standards of compliance with the law. Second, we strongly urge all providers to make sure that consumer protections are built into emerging products and services, right from the start. Consumer protections and compliance should not be mere add-ons or afterthoughts; they must be essential elements of the business model, from beginning to end.
We all have a vested interest in fostering a marketplace where consumers can understand and access the kinds of responsible products they can rely on throughout their financial lives. And the information consumers need to make decisions about their economic opportunities must be accessible, accurate, and reliable. You are in position to play a large role in helping all American consumers achieve key components of this overarching vision.
Let me offer an overview of efforts we are making to encourage innovations in the financial marketplace that will lead to products and services that are more accessible, more affordable, and more convenient for consumers. Our major initiative here is our Project Catalyst, which brings us face to face with many of you. It operates on the principle that markets work best when they are wide open to competition from new ideas. As Linus Pauling, who won two Nobel prizes, once said, “The best way to come up with a good idea is to come up with a lot of ideas.”
From early on, we have made it a priority to engage with financial innovators. We are regularly gleaning insights from industry pilot programs, devising policies to promote consumer-friendly innovation, and listening to the hopes and fears of the innovators themselves. Project Catalyst hosts an “Office Hours” program where we engage with startups, nonprofits, banks, and other financial companies. We are learning about what does and does not work for consumers and the potential challenges facing entrepreneurs and investors. If you want to learn more about our programs supporting financial innovation, please join us at a future Office Hours event.
Project Catalyst also conducts research pilot programs with companies both large and small to inform our understanding of emerging issues. To date, these include a pilot to encourage savings and a pilot to improve the effectiveness of early-intervention credit counseling, among others. We continue to receive and review new pilot ideas for consumer-friendly innovations or research questions, and we urge you to consider working with us in this way.
Project Catalyst is also devising new policies to foster innovations. Our Trial Disclosure Waiver Policy allows financial providers to develop new technologies and innovative approaches for designing and testing alternative consumer disclosures. We encourage you to consider working with us to test new disclosures that could promote greater transparency, improve consumer understanding, or reduce costs. Project Catalyst also administers our “no-action letter” policy, which is intended to help promote novel products that may not fit neatly within the existing regulatory structure, yet may yield significant consumer benefits. A no-action letter would state that Bureau staff does not intend to recommend any supervisory or enforcement action based on these particular innovations for a defined period. The purpose of the policy is to mitigate regulatory risk for products that promise substantial consumer benefit, where there is substantial uncertainty about how they may be viewed under existing law.
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 or more to their financial situations than 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 justifications 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.
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 have their legitimate interests 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 predict 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 defined as “credit.” 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 the consumer’s occupation or educational attainment. Other forms of alternative data may spring from new sources that never existed before, such as the use of mobile phones or the Internet. By filling in more details of people’s financial lives, 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 a 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 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 making 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 alternative data underwriting to benefit the very consumers that the fair lending laws are designed to protect. So we welcome you all to the frank and wide-ranging discussion we have begun on this subject. We are eager to hear your experiences and perspectives, and we encourage you to reach out to us.
We will continue to engage with you and others to work through these issues. 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. So let us travel this course together, and consider how we can direct our paths toward a better world for many millions of American consumers. 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.