How the CFPB Should "Regulate" Credit Reporting and Credit Scoring - Page 3 of 3

IV. Access to the Credit Score Lenders Use

I see a lot of inquiries from consumers wanting to know if the score they received or purchased from “x” website is the same score that a lender would access and use. Some sites provide access to the FICO or VantageScore scores which are two brands of credit score that may be purchased and used by lenders. Other sites may provide access to what are called educational scores that are not made available to lenders or that very few lenders obtain when making a credit review decision.

It is not always clear to the consumer which type of score is being delivered and the score ranges of the various credit score options are often similar enough that the consumer may assume the educational score version they received has the same meaning in terms of future risk as the credit score a lender would pull and use.

In my opinion this is about transparency to the consumer. Let the consumer know up front the branded name of the score and if it is materially used by lenders or if it is instead an educational score. The consumer can then decide what score version they want with full awareness of the score type.

In addition, many consumers have expressed frustration that they cannot purchase or proactively gain access to the same score brand that lenders access for credit decisions based on credit information at each of the three credit bureaus.

It is my understanding that the CFPB is already focused on this particular subject and I look forward to reading their research findings and understanding any new direction they may provide to the industry.

[Resource: Where Can I Get My Credit Scores for Free?]

V. Consumer Credit Education

Increasing and improving consumer financial literacy is an important focus of the CFPB and one that I fully support. In my opinion, the industry has done a decent job of creating informative educational content via a variety of different formats and delivery channels regarding how credit reporting and credit scores generally work.

As the saying goes, “you can lead a horse to the water, but you can’t make him drink.” This is true for credit education efforts. A continual challenge seems to be getting consumers to actively take advantage of all this robust educational material already in existence. Perhaps the CFPB will come up with creative ways to instill consumers with a desire to increase their knowledge about credit reports, scores and lending processes—something that is especially critical for younger people who are about to enter the credit world.

VI. Policy Decisions based on Empirical Findings

There are instances where policy decisions are recommended or made to exclude various data elements that are contained in the credit report from being displayed or being considered in a credit score. Two recent examples include the decision by the IRS to not report tax liens that have been paid and a proposal to delete from the credit report any paid or settled medical collection trade with an original amount of less than $2,500.

Lenders rely on credit report data to help them understand the future credit risk of applicants. The mandatory removal of predictive data elements could, in effect, misrepresent the true risk of that applicant and potentially provide them with access to additional credit they can’t successfully manage. It would be helpful if the CFPB could be called upon to conduct research regarding the predictive value of such data and impact of their removal when these policy decisions occur, and to share their research findings with appropriate industry and other governmental entities so that all participants can make a more informed decision about the inclusion (or not) of various data elements based in part on empirical findings.

These are just a few examples of how I can see the CFPB working with industry entities to provide value in the credit reporting/credit score space. I am sure there are many other agenda items that will surface and I anticipate we will see a lot of CFPB activity in the near future. We will help you keep track of it here at Credit.com.

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Image: Consumer Financial Protection Bureau, via Flickr