Go to:

September 2018
< Aug Oct >
Leaguer Email Subscription

You are not currently subscribed. Click Subscribe below to receive the Leaguer email.

Who Will Fill the Credit Reporting Void in the CFPB's Payday Plan?
Thursday, August 4, 2016 6:40 AM

Questions are multiplying about a key component of the Consumer Financial Protection Bureau's payday lending plan: the new credit-reporting system that would have to underlie it all.

The proposal would require payday lenders to submit credit information on their target market of subprime borrowers and to pull credit files when making loan decisions. Yet in two months since the plan was issued it has not become any clearer where exactly the necessary data would be drawn from, and who would collect it and spit it back out as usable credit reports.

A new system would have to be created because the big three credit bureaus do not collect information on subprime consumers. That said, the CFPB plans would not mandate the creation of such information systems, nor does it plan to distribute requests for proposals or let out contracts for bid. Instead, it will rely on the private sector to develop it on its own, perhaps spurred on by the opportunity of a new source of profits.

That may be its fatal flaw, one lender said. "They have thrown this thing up on the wall, but I don't think they have any certainty that anybody will even be able to provide this [credit-reporting service]," said Jamie Fulmer, a spokesman for Advance America, a payday lending firm in Spartanburg, S.C.

The CFPB believes that, if its proposed rule is finalized, "specialty consumer reporting agencies and state databases that already collect and report loan information" on the payday loan market "would be able to meet the bureau's registration criteria," said CFPB spokesman Sam Gilford, who noted that the proposal is still in the public-comment phase.

Why It's Difficult

Lenders would have to confirm a borrower's "ability to repay" before making a loan. To verify such information, lenders would rely on an "information system" as described in the CFPB's proposal that would act like a credit bureau.

The payday lending industry's reaction boils down to three concerns:

  • Credit histories for consumers who use payday, title, and installment loans either are too threadbare to be usable, too scattered among public and private sources to be unified in a single location, or simply don't exist.
  • It will be extraordinarily difficult, if not impossible, to build and implement the technology for these new credit bureaus from scratch to the CFPB's specifications.
  • Without this network of new credit bureaus, the CFPB's plan to regulate payday, auto-title, and installment lenders won't work. 

Most payday lenders already lack the technology and regulatory compliance sophistication of banks and collect little underwriting information on their customers. Requiring them to verify an applicant's debt and to file reports with a credit bureau is a tall order and may force many companies out of the business, said Craig Nazzaro, an attorney at Baker, Donelson, Bearman, Caldwell & Berkowitz who advises consumer lenders on compliance issues. "Most of these products are small-dollar loans and this regulation will add significant time and money into the underwriting process," Nazzaro said. "It may simply become too expensive to comply with."

Who Would Do It?

The big credit bureaus could probably develop the system the CFPB wants if the investment seemed worthwhile to them, experts said. But there's still no indication so far that Equifax, TransUnion and Experian are interested.

What the CFPB has currently proposed is not feasible, said Tim Ranney, CEO at Clarity Services in Clearwater, Fla., a so-called "thin file" credit bureau that collects data on subprime consumers. The CFPB wants all payday and title lenders to file reports to six different credit bureaus within a limited period of time, he said.

"It's an insurmountable challenge as far as we're concerned," Ranney said. "Think of some of the smaller lenders that are one-store operations and run their business with a PC on the counter."

Clarity has developed a solution that it believes would help the CFPB meet its goal for an information system, Ranney said. Clarity's product would produce the equivalent of a "credit card hold" on a payday-loan application. That would give the lender time to verify an application, typically days or weeks, depending on the lender's reporting cycle; and it would help prevent the problem of "loan stacking," in which a consumer obtains multiple payday loans in quick succession, without the lenders knowing of the other loans.

Clarity's technology, called a Temporary Account Record, in March received patent-pending status from the U.S. Patent Office. However, the CFPB has given no indication that it's interested in Clarity's product, Ranney said.

Read more at Credit Union Journal.