Fintech is leading the way in fairer credit. Artificial intelligence models are expanding access to credit with faster and more inclusive credit decisions. Open banking allows institutions to facilitate underwriting with an accurate, real-time look at consumers’ creditworthiness. Yet, credit reporting has not caught up to innovations in the marketplace.
In a live webinar, Ryan Sandler, CEO and Co-founder of Truework, Yolanda McGill, Vice President of Policy and Government Relations at Zest AI, Chris Willis, partner at Troutman Pepper, and Angelena Bradfield, Head of Policy and Government Affairs at the Financial Technology Association, discussed the ways fintech companies are expanding access to credit and what a more consumer-friendly future for credit reporting could look like.
Did you miss the conversation? WATCH the recording here.
The State of Play: 49 million Americans lack access to credit because they don’t have a credit score or have a thin credit file. Being “credit invisible” makes it hard to qualify for a home or auto loan or open a credit card. Even if people with a thin credit file do qualify for a loan, they often have to pay a much higher interest rate.
Moreover, the current credit reporting system can be a black box. More than half of the consumer complaints received by the Consumer Financial Protection Bureau (CFPB) are about credit reporting, with the most common complaints focusing on inaccurate information or improper use of a consumer’s credit report. The lack of transparency and control can lead to adverse outcomes for consumers, who may be denied credit or forced to pay higher rates on a loan.
Powered by Fintech: Fintech innovators like Truework and Zest AI are changing the landscape with cutting-edge technology that provides real-time insights into creditworthiness and puts consumers in control of their financial lives.
- Unlocking fairer credit assessments with AI/ML: As Yolanda McGill explained, fintech companies like Zest AI use artificial intelligence and machine learning to build fair and transparent credit decision-making models that “pull more signal out of the data” in traditional credit files. This technology helps lenders confidently assess borrowers who have thin credit files and, when combined with alternative data, can exponentially expand access to those who have been locked out of the credit system. AI has the potential to enable a less discriminatory alternative to the current credit score offerings in a compliant, equitable, and inclusive manner.
- Putting people back in control of their income data: Truework provides lenders access to verified income data for more than 95% of their applicants, making it easier for lenders to quickly and easily capture all available income to be used in credit decisioning. Ryan Sandler, CEO and Co-founder of Truework, believes that “consumer(s) should have access to a profile that contains their financial data” so they can have transparency into what is being taken into consideration for decisions around their lending needs. Equipping lenders with the full picture of income – from current and previous employers, self-employment, assets, social security, and the like – is the first step towards widening the data available for use in decisioning.
The Regulatory Landscape: The legal landscape around credit decisioning primarily revolves around two statutes: the Fair Credit Reporting Act (FCRA) and the Equal Credit Opportunity Act (ECOA), both of which date back to the 1970s, as Chris Willis explained during the webinar. However, in October, the CFPB proposed a rule that would accelerate a shift toward open banking under Section 1033 of the Dodd-Frank Act, which is meant to put consumers in control of their financial data. The CFPB has also proposed reforms to the FCRA aimed at medical bills and the broader credit reporting landscape.
- Zoom In: Open banking has the power to transform credit reporting by giving consumers the ability to control their personal financial information. A consumer can supply transaction information from a checking account to other financial services providers to access a more competitive savings rate, invest using a digital advisor, or access credit products.
- What It Means: Open banking could allow lenders to evaluate applicants directly rather than going through a credit reporting agency. For example, if a consumer’s checking account information shows inflows and outflows, a regular income, and no overdrafts, that information can help lenders make informed and timely decisions about creditworthiness. It will also give consumers more transparency and visibility into the information shared with lenders.
What’s Next: A More Competitive Future for Credit Reporting
The Financial Technology Association has called on the CFPB to implement 1033 in a way that secures clear consumer benefits and ensures competition and innovation. FTA also urged the CFPB to expand the rule’s scope so that consumers can get a fuller picture of their financial lives. For example, payroll information would help lenders verify an applicant’s employment and give a fuller picture of their financial health beyond their bank account transactions.