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By Matt Scuffham
April 8 (Reuters) - A chance conversation with a customer
ended up saving Vincent Lipford, a self-employed barber in
Memphis, Tennessee, more than $20,000.
The 51-year-old single father was stuck in a subprime auto
loan with a 25% annualized interest rate because he lacked the
credit history that would allow him to obtain financing from
traditional lenders. The interest would have cost him nearly as
much as the Kia Forte itself if he followed the payment plan to
fruition.
When Donald Hall, regional vice president at the Hope Credit
Union, strolled in one Saturday for his weekly haircut, he was
alarmed to learn about Lipford's situation. He helped refinance
the loan into another whose interest rate is just 4.2%, based on
his mobile phone and utility bill payment history - factors that
firms that determine credit scores and banks ignore.
The changes cut Lipford's monthly payments to $400 from
$640, saving more than $20,000 through the life of the loan.
"That made a huge difference. It took a lot of pressure off
me," Lipford said. "It's given me more financial freedom to pay
some other bills and do some things with my children."
Lipford is one of 64 million Americans who are trapped in a
credit-scoring Catch-22: they cannot obtain loans from banks
because they lack sufficient credit history, and they lack
sufficient credit history because they cannot obtain loans from
banks.
CONSUMER ADVOCATES VS RATINGS FIRMS
Reforming credit scores is one of U.S. President Joe Biden's
many priorities as he tries to repair the financial wreckage
caused by the coronavirus pandemic, which disproportionately
harmed minorities, women and low-income workers, according to
government data. During his campaign, Biden talked about
creating a public entity that would determine credit scores in a
more accurate and less discriminatory way.
As it stands, lenders rely on three big rating firms -
Equifax Inc, Experian Plc and TransUnion
- to determine creditworthiness. They generate a "FICO"
score for borrowers, on a scale of 300 to 850, based on income,
savings, assets, loans and history of debt repayment. Scores
above 700 are generally considered solid.
The Biden administration wants to create an entity within
the Consumer Financial Protection Bureau (CFPB) that would
incorporate factors like rent and utility payments into lending
decisions, three sources familiar with the plan said.
Such a move would require congressional approval but CFPB
officials are already discussing how it might be set up, the
sources said.
Credit reporting firms oppose the move, saying they are
already working to provide fair and affordable credit to all
consumers. A public credit bureau would be bad for consumers
because it would expand the government's power in an
inappropriate way and its goals would shift with political
winds, the Consumer Data Industry Association (CDIA), which
represents private rating firms, said in a statement.
Industry experts and consumer advocates disagree.
Almost half of consumers in low-income neighborhoods do not
qualify for traditional loans under current methods, according
to CFPB research. A public entity utilizing nontraditional data
could change that, experts say.
"Using alternative data holds a lot of promise for the CFPB
to accurately underwrite people who are 'credit invisibles,'"
said Christopher Willis, a partner at law firm Ballard Spahr who
helps banks work through consumer regulatory issues.
CHANGES IN THE WIND
The CFPB has already been examining ways to make the
existing system fairer. Rohit Chopra, Biden's nominee to lead
the CFPB, mentioned problems with credit scores during his
testimony before a Senate committee on March 2.
Nearly 60% of complaints the CFPB received last year were
about errors and other issues with credit scores. Under Chopra,
the bureau would push private firms to fix inaccurate
information, the sources said.
CFPB officials are also discussing how to use artificial
intelligence in lending decisions, sources said. The bureau may
issue guidelines to ensure lenders can use algorithms in a
manner that is inclusive and does not reinforce discriminatory
practices, they said.
The CFPB declined to comment on any of the issues.
The bureau and other U.S. regulators said last week they
were seeking public input on the growing use of AI by financial
institutions.
The planned changes could help people like Andrew
Ballentine, 48, a skilled laborer from Cleveland, Ohio, who had
his hours cut during the pandemic.
Without much credit history, Ballentine was unable to
qualify with traditional lenders. Eventually, HFLA of Northeast
Ohio, a nonprofit, offered him a $1,500 interest-free loan.
"If they weren't there, I hate to think what would have
happened to me," he said. "I would probably have been evicted."
(Reporting by Matt Scuffham in New York
Additional reporting by Katanga Johnson in Washington
Editing by Lauren Tara LaCapra and Matthew Lewis)
