Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
On June 15, the CFPB published a blog post calling on the Buy Now Pay Later (BNPL) industry to establish standardized codes and formats for furnishing information to credit reporting agencies that take into account the unique characteristics of these short-term, no-interest consumer credit products. Citing to the rapid growth within the BNPL industry, the Bureau stressed the need for standardization in how BNPL debts are reported on consumers’ credit reports. According to the Bureau, the three major credit reporting agencies have different policies for handing positive and negative reports on BNPL transactions in consumers’ core credit files. Moving to a more standardized approach would “facilitate the consistent and accurate furnishing of BNPL payment information” the Bureau said, noting that the agency “believes that when BNPL payments are furnished it is important that lenders furnish both positive and negative data.” Consumers who pay on time and may be seeking to build credit should receive the benefits of making timely payments on their BNPL debts, the Bureau said, explaining that this may also impact lenders seeking to understand how much debt a consumer is carrying.
The Bureau stressed it will continue to monitor the progress of BNPL lenders, credit reporting agencies, and credit scoring companies, and said it plans to “revisit this issue as part of a broader report on the industry stemming from our market monitoring order and responses to a public request for comments.” The Bureau is currently conducting an industry review, which includes a series of orders sent last December to five companies seeking information on the risks and benefits of the BNPL credit model (covered by InfoBytes here).
Recently, a consumer reporting agency (CRA) informed lenders and industry members that it experienced a coding issue when it changed some of the technology to its legacy online model platform. As a result of the issue, the CRA advised that the miscalculation impacted approximately 12 percent of credit scores, although credit reports were not affected.
In response, on June 1, Fannie Mae issued a notice regarding the coding error. Fannie Mae reminded lenders “of their obligations under the Selling Guide to correct erroneous credit data, ensure the accuracy of the credit data submitted to Desktop Underwriter® (DU® ) at the time of loan sale, and to provide any corrected information to us.” Freddie Mac issued a similar notice advising lenders of their credit reporting and data correction responsibilities. Both Fannie Mae and Freddie Mac are monitoring the situation and may issue additional guidance regarding the coding issue.
On September 30, the CFPB released a Data Point report, titled Subprime Auto Loan Outcomes by Lender Type, which examines interest rate and default risk trends across different types of subprime lenders, including how much of the variation of interest rates charged among subprime lenders can be explained by differences in default rates and how much is left to be explained. The report found notable average differences across lender types in the borrowers they serve and the types of vehicles they finance. Banks and credit unions offering subprime auto loans typically lend to borrowers with higher credit scores compared to finance companies and buy-here-pay-here dealerships, the report noted, adding that different lenders also charge very different interest rates on average. According to the report’s sample, a bank’s average subprime loan interest rate is approximately 10 percent, compared to 15 to 20 percent at finance companies and buy-here-pay-here dealerships. The report found that higher default rates were found at lenders that charged higher interest rates, and that “the likelihood of a subprime auto loan becoming at least 60 days delinquent within three years is approximately 15 percent for bank borrowers and between 25 percent and 40 percent for finance company and buy-here-pay-here borrowers.”
However, the report presented statistical analysis that called into question whether differences in default rates fully explained the average differences in interest rates across subprime lender types. As an example, an average borrower with a 560 credit score or higher would have the same default risk whether the borrower obtained a loan from a bank or a small buy-here-pay-here lender, but the estimated interest rate would be nine percent with a bank loan versus 13 percent from a small buy-here-pay-here lender. The report noted that there are other variables, not observed in the data collected, that may explain differences in interest rates charged by different types of auto lenders, such as down payments, vehicle values, variations in borrowers’ access to information, borrowers’ financial sophistication, and variations within lenders’ business practices and incentives.
On August 4, in an action brought by the CFPB and the Arkansas attorney general, the U.S. District Court for the Eastern District of Arkansas entered a stipulated final judgment and order against a Utah-based home-security and alarm company (defendant) for allegedly failing to provide proper notices under the FCRA. As previously covered by InfoBytes here, according to the complaint, the company extended credit to its customers by allowing them to defer payment for alarm and security-system equipment over the life of a long-term contract. In extending credit to its customers, the company allegedly obtained and used consumers’ credit scores to determine the amount of activation fees it would charge for its products and services and then charged higher fees to consumers who had lower credit scores, without providing those consumers with required risk-based pricing notices in accordance with the FCRA and Regulation V. Under the terms of the order, the company is required to submit a compliance plan and pay a $600,000 civil money penalty, of which $100,000 will be offset if it pays that amount to settle related litigation with the State of Arkansas that is pending in state court. The company will also be required to provide proper risk-based pricing notices as required under the FCRA.
Industry group sues to stop Washington’s emergency rule banning credit scoring in insurance underwriting
On April 8, the American Property Casualty Insurance Association (APCIA) filed a lawsuit in Washington Superior Court in an attempt to stop an emergency rule issued last month by the Washington Insurance Commissioner, which bans the use of credit-based insurance scores in the rating and underwriting of insurance for a three-year period. The rule specifically prohibits insurers from “us[ing] credit history to place insurance coverage with a particular affiliated insurer or insurer within an overall group of affiliated insurance companies” and applies to all new policies effective, and existing policies processed for renewal, on or after June 20, 2021.
According to a press release issued by the Commissioner, the emergency rule is intended to prevent discriminatory pricing in private auto, renters, and homeowners insurance in anticipation of the end of the CARES Act, which will expire 120 days after President Biden declares an end to the national emergency caused by the Covid-19 pandemic. Under the CARES Act, Congress required furnishers of information to credit bureaus to modify credit reporting practices if and when they grant an “accommodation”—that is, an agreement to defer payments, modify a loan, or grant other relief—to borrowers impacted by the Covid-19 pandemic, irrespective of asset type to ensure that borrowers who sought and obtained forbearance or other relief were not credit reported as becoming delinquent or further delinquent as a result of the forbearance or other relief (see Buckley Special Alert), which the Commissioner believes has disrupted the credit reporting process and reportedly caused credit bureaus to collect inaccurate credit histories for some consumers. The Commissioner further contends that because “the predicative ability of current credit scoring models cannot be assumed,” scoring models used by insurers to set rates for policyholders have been degraded and will have a disparate impact on consumers with lower incomes and communities of color. Sources report that APCIA’s lawsuit—which seeks declaratory and injunctive relief (and asks the court to declare the Commissioner’s rule invalid and to enjoin its enforcement)—claims the Commissioner’s rule will harm insured consumers in the state who pay less for auto, homeowners, and renters insurance because of the use of credit-based insurance scores to predict risk and set rates.
On December 11, the CFPB and the Arkansas attorney general announced a proposed settlement with a Utah-based home-security and alarm company for allegedly failing to provide proper notices under the FCRA. According to the complaint filed in the U.S. District Court for the Eastern District of Arkansas, the company allows consumers to defer payment for the alarm and security-system equipment over the life of a long-term contract, and therefore extends credit to its customers. The company—in extending credit to its customers—allegedly obtained and used consumers’ credit scores to determine the amount of activation fees it would charge for its products and services, and then charged consumers who had lower credit scores higher fees without providing those consumers with required risk-based pricing notices. Under the FCRA and implementing regulation, Regulation V, companies are required to provide notice to consumers if a consumer receives less favorable credit terms based on a review of his or her credit report. Under the proposed settlement, the company is required to pay a $600,000 civil money penalty, of which $100,000 will be offset provided the company pays that amount to settle related litigation with the State of Arkansas that is currently pending in state court. The company will also be required to provide proper risk-based pricing notices under the FCRA.
As part of the CFPB’s Consumer Financial Protection Week, the Bureau released several reports and tools, including a recently published study analyzing the impact of credit builder loans (CBLs) on consumer credit scores. The study, Targeting Credit Builder Loans: Insights from a Credit Builder Loan Evaluation (accompanied by a practitioner’s guide and research on CBLs), provides insight for community-based organizations and financial institutions on expanding financial inclusion through the use of CBLs, which are designed to assist individuals with no credit records or poor credit histories to build or repair their credit. According to the Bureau, the central feature of a CBL is that a borrower makes payments before receiving funds. When a CBL is opened by a borrower, the lender moves its own funds into a locked escrow account and the borrower makes installment payments, including interest and fees, typically over a period of six to 24 months. These payments appear on the borrower’s credit report, and the lender deposits the principal payments into the borrower’s savings account “after each payment or in entirety when the borrower completes the program.” According to the Bureau, a typical CBL ranges from $300 to $1,000. The Bureau’s study examined 1,531 credit union members who were offered CBLs. The research revealed that a CBL increased the likelihood of having a credit score by 24 percent for borrowers without an existing loan, and that borrowers without existing debt saw their credit scores rise by 60 points more than borrowers carrying existing debt. Additionally, the Bureau found an association between having a CBL and an increase in a borrower’s savings balance. The Bureau cautioned, however, that the study’s findings also indicated that CBLs appeared to cause a decrease in credit scores for borrowers with existing debt, suggesting that these borrowers experienced difficulty making payments on both their CBL and their existing debt obligations.
The Bureau also released the results from the Making Ends Meet survey, which provides insight into how U.S. consumers cope with financial shortfalls. The survey, conducted prior to the Covid-19 pandemic in May 2019, offers a nationally representative assessment of consumers with credit records. Among its findings, the report noted that 52 percent of survey respondents said they could cover expenses for two months or less without their main source of income, while 20 percent could cover expenses for only two weeks or less.
A report exploring the credit records of young servicemembers that compares servicemembers’ credit profiles to the credit profiles of civilians was also recently published, along with an online tool to help students make informed decisions about paying for college.
On July 7, the CFPB issued its semi-annual report to Congress covering the Bureau’s work from October 1, 2019, through March 31, 2020. The report, which is required by the Dodd-Frank Act, addresses, among other things, problems faced by consumers with regard to consumer financial products or services; significant rules and orders adopted by the Bureau; and various supervisory and enforcement actions taken by the Bureau. In her opening letter, Director Kathy Kraninger discusses the Bureau’s response to the Covid-19 pandemic, stating that the Bureau has participated in “countless joint statements, virtual co-appearances, and shared broadcasts to stakeholders with [their] prudential partners” and has “directly engage[d] consumers with the right information, at the right time.”
Among other things, the report highlights first time homebuyers and credit scores as areas in which consumers face significant problems, citing to the Bureau’s Market Snapshot on First-time Homebuyers and the quarterly consumer credit trends report on public records. In addition to highlighting the Bureau’s previous efforts during the reporting period, the report notes upcoming initiatives and plans, including (i) the Taskforce on Federal Consumer Financial Law’s public listening sessions in the fall; (ii) the cost-benefit analysis symposium in July; and (iii) further work on their Covid-19 pandemic responses.
On March 9, the FTC filed a complaint against a Colorado-based credit repair company and its owner for allegedly making false representations to consumers regarding their ability to improve credit scores and increase access to mortgages, personal loans, and other credit products in violation of the Credit Repair Organizations Act, the FTC Act, and the Telemarketing Sales Rule. In its complaint, the FTC alleged that the defendants charged consumers illegal, upfront fees ranging from $325 to $4,000 per tradeline with the deceptive promise that they could “piggyback” on a stranger’s good credit, thereby artificially inflating their own credit score in the process. As the FTC explained, “piggybacking” occurs when a consumer pays to be registered as an “additional authorized user” on a credit card held by an unrelated account holder with positive payment histories. The FTC alleged that the defendants’ practices did not, in fact, significantly improve consumers’ credit scores as promised, and that while the defendants claimed on their website that their piggybacking services were legal, the FTC “has never determined that credit piggybacking is legal” and the practice does not fall within the protections of the Equal Credit Opportunity Act. Under the terms of the proposed settlement, the defendants will be banned from selling access to another consumer’s credit as an authorized user and from collecting advance fees for credit repair services. The defendants will also be required to pay a $6.6 million monetary judgment, which be partially suspended due to the defendants’ inability to pay.
On February 3, the CFPB issued its semi-annual report to Congress covering the Bureau’s work from April 1, 2019, through September 30, 2019. The report, which is required by the Dodd-Frank Act, addresses, among other things, problems faced by consumers with regard to consumer financial products or services; significant rules and orders adopted by the Bureau; and various supervisory and enforcement actions taken by the Bureau. In her opening letter, Director Kathy Kraninger reported that she has focused, “whenever appropriate and possible” on two areas: (i) encouraging saving, by establishing a program called “Start Small, Save Up”; and (ii) unleashing innovation by reducing regulatory constraints and revising innovation policies and promoting cooperation between state and federal regulators, as demonstrated with the launch of the American Consumer Financial Innovation Network last year.
Among other things, the report highlights credit scores, credit reporting, and the consumer credit card market as areas in which consumers face significant problems. The report notes that credit reports and credit scores greatly affect credit available to consumers. With respect to the availability of general purpose credit cards the report cites Bureau findings that in 2018, consumers with high credit scores had an 83 percent approval rate, whereas consumers with subprime credit scores had only a 17 percent approval rate. In addition to these areas of focus, the report notes the issuance of one significant final rule—Payday, Vehicle Title, and Certain High-Cost Installment Loans; Delay of Compliance Date; Correction Amendments—last year. (Covered by InfoBytes here.) Several less significant rules were also finalized, including (i) Technical Specifications for Submissions to the Prepaid Account Agreements Database; (ii) Availability of Funds and Collection of Checks (Regulation CC); and (iii) Home Mortgage Disclosure (Regulation C)–2019 Final Rule.