Disruption is rampant within the US credit reporting ecosystem: Americans have skipped payments on over 100 million accounts since mid-March. At the same time, the CARES Act mandates that pandemic-associated missed payments and delinquencies be treated differently. As FinRegLab recently pointed out, the very integrity of credit data for making accurate lending decisions is at stake.
It's a pleasure to welcome credit reporting veteran, Tom Oscherwitz, to discuss the current credit reporting landscape. Tom was previously a senior advisor at the Consumer Financial Protection Bureau (CFPB) and now serves as US legal counsel at credit data fintech, Aire.
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Mack: Welcome, Tom. What long-term effect do you foresee on credit reporting as a result of the current crisis?
Tom: Though we’re still in the early stages, COVID-19 has already imposed a fog of uncertainty regarding the predictiveness of traditional credit models. It’s a classic black swan event that none of us anticipated.
Much of what is acutely needed in consumer finance right now isn’t entirely new: the fintech community has for years pushed mainstream lenders to consider alternative data to engage the consumer. And as recently as December last year, this thinking became more widely recognized by the federal financial regulators in their acknowledgement of the significant help that non-traditional sources of data could have for consumers.
The COVID-19 crisis is likely to accelerate this trend to rethink traditional credit modeling. Having even slightly outdated information raises a risk that financial institutions need to mitigate. So if there was ever a time lenders could use these new tools and approaches, it’s now. I hope we’ll look back at this time as an era of industry innovation and transformation.
"The COVID-19 crisis is likely to accelerate this trend to rethink traditional credit modeling."
Mack: Not all readers may be familiar with the fintech you recently joined, Aire. What excites you most about Aire and joining the team?
Tom: At the Consumer Financial Protection Bureau (CFPB), I spent a number of years overseeing the US consumer reporting industry. Our credit reporting system supports millions of credit decisions annually, but it still has huge gaps. According to the CFPB’s research, 26 million consumers do not have a file at the nationwide credit bureaus. And, even where traditional credit histories on consumers are available, COVID-19 has shown structural limitations in the data: it’s not timely enough, it lacks consumer income and expense data, and it provides no information on current employment status.
So from my vantage point, I can tell you that Aire brings several absolutely critical pieces to the table. Aire can help lenders evaluate the creditworthiness of any consumer and can do it in near real-time. Aire is laser-focused on collecting, validating, and analyzing data directly supplied by consumers themselves (otherwise known as first-party data) to provide lenders with a real-time, holistic picture of their circumstances. For instance, our core product, Pulse, is built to deliver rapid, actionable insight on the current financial situation of existing customers. Our insights come from consumer information on current income and expenses, their financial resilience, their employment status, and even about their prospective income.
Aire was founded in the UK and thought very deliberately about how to enter the US market. It’s committed to doing the necessary, hard work to build out its compliance systems in the US in order to deliver lasting value for lenders. Aire recognized early on that to succeed here it had to win the trust and confidence of regulators and consumers. This, for obvious reasons, has been music to my ears and made my decision to join Aire back in March an easy one.
"COVID-19 has shown structural limitations in credit data: it’s not timely enough, it lacks consumer income and expense data, and it provides no information on current employment status."
Mack: The CFPB recently addressed the perceived regulatory uncertainty on the subject of AI/ML in credit underwriting, highlighting specifically that the existing regulatory framework accommodates new innovations in analytics. What's your take on the CFPB's comments?
Tom: I consider the blog a bullish statement from the CFPB on a lender’s ability to use responsible AI in a compliant way. As the CFPB noted, ‘the existing regulatory framework has built-in flexibility that can be compatible with AI algorithms.’
Several years ago, when talking to folks in the industry, I might have argued that the lack of explainability of ‘black box’ AI models inhibited their deployment in consumer lending. No longer. Techniques like SHAP (SHapley Additive exPlanations) now give lenders a clear pathway to explain model output. The CFPB blog tacitly acknowledges these advances when it notes, the ‘industry continues to develop tools to accurately explain complex AI decisions, and we expect more methods will emerge.’
Mack: The CARES Act calls for delinquencies associated with the pandemic to be furnished to credit bureaus differently than delinquencies in the past. There’s debate as to whether this change adversely affects the ability of lenders to accurately assess consumer risk. What effects might this have on consumer's access to credit?
Tom: I appreciate the sentiment behind the CARES Act provision in imposing constraints on lender reporting of forbearances to consumer reporting agencies to help consumers weather the crisis. COVID-19 has slashed the pocketbooks of millions of households as you’ve recently reported in your newsletters. But though well intended, I fear these provisions may make it harder for consumers to get credit at desirable terms. Between March and the end of May, American consumers deferred debt payments on more than 100 million accounts. For these millions of accounts, lenders now have less visibility into consumer credit performance.
I don’t think it’s a coincidence that lenders have tightened underwriting standards in recent months. When faced with uncertainties, it is only logical for a lender to cut back on lending or only issue loans with a greater margin of safety. What really matters now, is what they do next…
"Though well intended, I fear these provisions may make it harder for consumers to get credit at desirable terms."
Mack: Absolutely. What gives you optimism amidst the current environment?
Tom: I’m optimistic because of the increasing number of new entrants in the market with a strong mission to create positive change for consumers. The focus has rightly shifted to the consumer and the building of more ethical, sustainable business models, not just trying to optimize the amount of revenue that they generate.
A great example of that is Aire: our motto is that ‘we exist to make credit equitable for everyone’ - now more than ever, that vision statement feels vital to the credit ecosystem.
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Learn more about credit fintech Aire - a new kind of credit bureau, built for the consumer - and now operational out of Washington DC.