Bank Director | Fair Credit Reporting Act Archives

Rising consumer debt, the potential specter of recession and an intensified regulatory focus on credit reporting and disputes management are creating a perfect storm for companies that provide credit, including banks.

And yet, from my vantage point as an expert in credit dispute operations technology, I see troubling gaps in how furnishers conduct their credit dispute management operations. Weak credit dispute management will be a liability for banks. My advice to leaders of operational risk and portfolio operations business lines? Shore up your operations now before the inevitability of a rising tide of disputes overwhelms you.

Some effects of a slowing economy that hint at a potential recession are already affecting consumer pocketbooks. Rising consumer prices continue to curtail spending as consumers prioritize groceries and gas over other expenses, most notably debt repayment.

Add spiraling interest rates to that mix, and it should come as no surprise that consumer debt has ballooned to new highs that surpass pre-Great Recession levels. This comes as the job market is expected to eventually trend downward and tools that cash-strapped consumers use, like buy now, pay later, become more popular. These worrisome indicators all point to a significant reboot in the consumer credit score cycle. Here’s what that shift looks like:

Lenders look to adjust credit risk.
Loan pricing tightens.
Interest rates increase as credit scores decrease.
Cost of funds increases for consumers with lower credit scores.
Consumers take a greater interest in their credit score.
Furnishers see dispute volumes increase.
Consumers get frustrated and turn to credit repair organizations (CROs).

Yes, we’ve been down this road before and weathered it. But this time could be different.

A Renewed Focus on the FCRA
What is unique to this 2022 cycle, compared to the last cycle that spanned 2009 to 2014, is the notable change in the federal government’s interest in consumer protection. During the last cycle, fewer consumers had the savviness or empowerment to understand credit reporting and scores; additionally, the Consumer Financial Protection Bureau had just been created. Today however, the CFPB is strong, established and primed to act.

Even prior to the war in Ukraine and inflation materialized, CFPB Director Rohit Chopra had already begun laying out his thesis on stronger consumer credit protections — one that includes a far more intentional focus on credit furnishing and dispute provisions within the Fair Credit Reporting Act, or FCRA. The CFPB has clearly signaled that FCRA adherence is its top priority and that this time around, furnishers will be held to account.

Efficiency will protect and help your bank manage the increased volume of disputes expected in an era of stronger consumer credit protections. Let’s examine where those disputes are coming from. Disputes originating from credit repair organizations are the top concern for credit providers. A poll from a recent Consumer Data Industry Association conference shows that 74% of the respondents identified CROs as the “biggest pain point” in their operations. Additionally, the market size for these services is expected to grow by 9.5% this year.

That’s a clear signal for every organization to shore up its credit dispute management and credit furnishing today. Organizations need to be able to demonstrate accurate furnishing standards and adherence, produce relevant policies and procedures that encapsulate reasonable investigation for credit reporting disputes and, above all, adequately demonstrate evidence that “what was said would be done and what was actually done” match. To do anything else is to unnecessarily invite increased regulatory scrutiny at a time when credit furnishers are most vulnerable.

How well prepared is your bank for this increased regulatory scrutiny? If you’re not sure, reach out to a trusted expert to help evaluate and implement the technology and regulatory guidance needed to help accurately and efficiently resolve credit reporting issues before they become disputes.

Is it time for banks to start using Facebook profiles to offer a loan? Or a person’s Gmail account to verify an identity? A growing number of fintech start-up companies say so.

Banks have traditionally relied on credit bureaus to supply information not only about a person’s FICO score, but also to verify identity with data such as addresses. But sometimes, these data sources come up short. Tommy Nicholas, one of the founders of New York-based startup Alloy, says he has a few banks trying out his company’s platform, which basically allows a la carte access to a variety of traditional and nontraditional data sources to verify a customer’s identity, including credit bureaus as well as services that scan social media profiles or email accounts.

The idea is to make it easier for a bank to verify someone’s identity when traditional sources fall short, for instance, the person moved recently and the new address isn’t showing up on the credit report. “You end up asking half your customers to go find a phone bill and send it to you, not to mention you have all this manual work to do,’’ Nicholas says. “It adds a lot of friction.”

Alloy is trying to get traditional commercial banks interested in the technology for verification purposes, although its use to approve loans may be a ways off. Nonbank lenders already are using a host of online and offline data to make credit decisions, especially micro-finance lenders in developing countries that lack functioning credit bureaus. Some lenders are going so far as to analyze behavioral data to make credit decisions. Smartphone data, for example, can tell a lender that you regularly use a gambling app, which could be a black mark on your alternative credit score. Customers have to agree to provide lenders with the smartphone and social media data before they can be approved for credit. Facebook recently applied for a patent to use data on its users for loan underwriting—if your friends’ average credit score met a minimum, that could be a sign that you were a good credit as well, because you associate with people who have good credit.

Lenddo, which typically works with banks in emerging markets but recently began offering its service to U.S. financial institutions, has an algorithm that assigns a non-traditional credit score based on a variety of data to predict your willingness to pay back your loan. It also verifies identity using non-traditional data, such as Facebook profiles and email accounts. Socure uses what it calls social biometrics, where it pulls data from sources such as email, phone and social media accounts to create a risk score for fraud detection. Customers have to opt in to share their data. Other companies, such as Puddle, allow people to build a trust network online to give small dollar loans to each other. Everyone contributes something to the pool, and the more people you add to your trust network, the more you are able to borrow. Paying back your loan on time increases your trustworthiness.

Advocates of the use of alternative data, like Daniel Castro, the director of the Center for Data Innovation in Washington, D.C., say the plethora of online and offline data on each person is actually making it easier to detect fraud because it’s very difficult to sustain a fake identity online that will pass scrutiny. For example, if you worked somewhere for years, you probably have LinkedIn contacts who worked at that same employer. According to Castro, it’s extremely hard to fake your connections to multiple legitimate people. “More data can be useful,’’ he says. “Long term, every bank will be integrating more data sources. It will just be malpractice on their part not to, because it will reduce risk. It will just take awhile before they figure out the best way to do that.”

John ReVeal, an attorney at Bryan Cave, says the new technologies raise questions about complying with existing banking laws. For example, the Fair Credit Reporting Act applies both to credit and deposit accounts, and consumers have a right to know why they were rejected for either type of account. That could turn some of the new data providers into de-facto credit reporting agencies, he says. Additionally, banks may have to answer questions from their regulators about how they use alternative data to make credit decisions, and ensure such decision-making doesn’t violate anti-discrimination laws.

Will the new technologies provide a better way to analyze credit and approve accounts? That remains to be seen. For now, banks and alternative providers are experimenting with the possibility of augmenting traditional sources, rather than replacing them.