As federal regulators continue efforts to rein in the payday loan industry, one surprising byproduct will likely be the creation of a new kind of credit bureau.
The Consumer Financial Protection Bureau has proposed new rules dealing with short-term, high-interest loans like title and payday loans. These mainly focus on preventing consumers from getting trapped in a cycle of repeat borrowing. But perhaps the most ambitious part of the plan is the requirement that lenders report loan payment results to… to what?
Traditionally, the nation’s large credit bureaus haven’t taken data on payday loans, title loans, and other similar short-term products. That means borrowers who pay them back on a timely basis don’t get the credit they deserve; and it makes it harder for them to “graduate” to more traditional loan products.
So the CFPB has called for creation of a new kind of credit reporting agency – and given them the decidedly un-sexy moniker, “Registered Information System.” But to borrowers trying to show they are worthy of credit, an RIS might sound just right.
Credit Can Be Hard to Come By
“Every time a consumer pays off a loan of any kind, their opportunity grows,” said Greg Rable, CEO of a firm named FactorTrust. His company already collects and sells data on short-term loan borrowers, and it hopes to be one of the main Registered Information Service players when the CFPB rule is finalized. “Inclusion of alternative credit data is critical to both parties. We’ve seen people improve their credit scores – at every scoring level — by having alternative credit data available in the underwriting process. More data is better for both the consumer and the lender.”
The CFPB proposed its new short-term lending rules this spring, and what’s expected to be a cantankerous public comment period ends in October. After that, a final rule will be published perhaps a year later. The rules are likely to require that lenders examine borrowers’ “ability to repay” the loans, perhaps by forcing lenders to know more about their consumers’ debt and income status. A Registered Information Service, like a credit bureau, could be the source of such data to lenders. In turn, an RIS would also give borrowers a chance to build up a history of making good on debts. On the other hand, it might also make life harder for consumers who have failed to pay back loans in a timely way. And it creates another data stream for consumers to worry about.
A Wider Net
Efforts have been underway for years to expand the number of consumers who have credit scores and credit reports, so they can participate in the credit economy. Last year, the CFPB found that one out of 10 U.S. adults is “invisible” to the credit industry because of either non-existent or “thin” credit files.
Many would benefit from inclusion of a wider set of criteria in setting credit scores, the industry has argued. For example, in 2015, Experian released a study showing that inclusion of non-traditional credit items like utility payments would lift millions of consumers out of subprime status. It also found that including rent payment history would lift 20% of consumers out of subprime status.
Whether the RISs would help people build traditional credit remains to be seen — and could be a long-time coming, given all the parties, including the major credit scoring models and main bureaus, that would have to get on board. But their reports could make it easier for credit-challenged consumers to get a better rate on a payday loan. (To see where your traditional credit currently stands, you can view two of your credit scores for free each month on Credit.com.)
The Difficulties With Data Collection
Collecting payment data from short-term lenders is a big task. For starters, the industry moves fast. Borrowers often have as little as two weeks to repay loans, so performance data must be compiled quickly – close to real-time, Rable said. Traditionally, credit bureaus receive monthly updates from data “furnishers” like lenders, but that would be too slow for a payday lender who might be considering a loan to a consumer who took out another one just days earlier.
Rable said he’s also worried that small lenders who don’t have systems in place will suddenly be faced with complex reporting requirements; they might have to send data to 5 or even 10 different outlets, he said.
“For a lot of these guys, this will be a brand new thing,” he said. “For big banks, they report to one or two big credit bureaus. …Our view is the fewer the better on the RIS side to deal with the complexity.”
Consumers will face complexity, too. Each RIS will have to develop a dispute process, for example. It’s possible consumers might have to complain about errors to each system individually – once they even discover the existence of an RIS that’s holding negative information on them. Already, disputes are a big source of headaches in the traditional credit bureaus.
While Gable favors use of more data in the short-term lending industry, he said the verdict is out on how the new CFPB rules might impact both lenders and borrowers.
“It’s yet to be determined if this is good for consumers and the industry,” he said. “Initially, it’s going to be a very big challenge for the industry.”