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No Credit History, No Problem: CFPB Ponders Novel Credit Scoring Ideas



Last month, the CFPB issued a Request for Information (“Request”) to identify potential ways to increase credit access for underserved segments of the population. In particular, the CFPB noted that certain groups of individuals lack enough credit history to obtain a reliable credit score. While the CFPB’s Request was primarily directed at the financial services industry, the Request also sought input and comments from all interested members of the public.

Generally speaking, an individual’s credit score (and creditworthiness) is assessed based on his or her credit report. A credit report includes a variety of information about the individual’s financial history, including whether he or she regularly makes debt payments on time and the types of debt he or she has incurred (such as mortgages, credit cards, and other forms of loans). This information is then plugged into an algorithm (or generated by a third party, such as FICO or VantageScore Solutions) to calculate the individual’s credit score. The higher the credit score, the easier it is to obtain credit at favorable rates (and vice-versa).

If an individual’s credit report lacks traditional forms of credit history, his or her credit score may suffer. For example, if an individual has never had a mortgage (which is the case for an increasing number of millennials) or qualified for a credit card or other loan, the individual’s credit report may lack valuable information to plug into the algorithm, which in turn places him or her at a severe disadvantage when seeking affordable credit.

According to the CFPB, an estimated 26 million Americans are “credit invisible,” meaning they lack sufficient credit history with a reporting agency (such as Equifax, TransUnion, or Experian) to produce a credit score. Another estimated 19 million Americans are considered “unscorable” because their credit file is too thin or stale to produce a reliable credit score. Consequently, lenders shy away from such borrowers, and those individuals face barriers to credit, including having to agree to higher interest rates.

On these points, the CFPB noted in its Request:

Most of these 45 million Americans are underserved by the mainstream credit system and they are disproportionately Black and Hispanic, low-income, or young adults. Some populations, like those recently widowed or divorced or recent immigrants, have difficulty accessing the mainstream credit system because they have not established a long enough credit history on their own or in this country. Some underserved consumers instead resort to high-cost products that may not help them build credit history.

To combat these issues, the CFPB is exploring whether it is advisable to consider unconventional sources of information to help build and supplement an individual’s credit history. This “alternative data” may include:

  • Rent payments,
  • Insurance payments,
  • Phone bills,
  • Cable TV payments,
  • Bank account information, such as deposits, withdrawals, or transfers,
  • Frequency of changes in residences, employment, phone numbers, etc.,
  • Education and occupation, and
  • Social media and the ways the individual interacts with the website.

The theory is that these alternative forms of information could provide valuable insight into an individual’s history of meeting debt obligations and, thus, ultimately improve his or her credit score. For example, an individual may not have a traditional loan repayment history but might pay a phone bill on a timely and regular basis, which could reassure lenders that he or she is a viable credit risk. The CFPB noted that “[p]otentially millions of consumers previously locked out of mainstream credit could become eligible for credit products that might help them buy a car or a home.” That being said, there are obvious risks associated with analyzing this information during the credit application process, such as claims of discrimination, privacy concerns, and issues related to inaccurate or incomplete information.

At this point, the CFPB is only seeking public feedback with respect to the opportunities and pitfalls of using alternative data sources in making lending decisions. As discussed above, the CFPB is seeking comments from all interested members of the public, which must be received by May 19, 2017. In light of the significant opportunities associated with alternative data sources (and the large undeserved pool of potential borrowers), many forward-thinking lenders will undoubtedly keep a close eye on the CFPB’s stance on these practices and consider adjusting their lending practices accordingly.

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