By Matt Scuffham
(Reuters) – A casual conversation with a client ended up saving Vincent Lipford, a self-employed barber in Memphis, Tennessee, from more than $ 20,000.
The 51-year-old single father was stuck on a subprime car loan with an annualized interest rate of 25% because he did not have the credit history that would allow him to obtain financing from traditional creditors. The interest would have cost him almost as much as Kia Forte himself had he followed the payment plan to the end.
When Donald Hall, regional vice president at Hope Credit Union, showed up on a Saturday for his weekly haircut, he was alarmed to learn about Lipford’s situation. He helped refinance the loan into another with an interest rate of just 4.2%, based on his cell phone and payment history for utility bills – factors that determine credit scores and banks ignore.
The changes reduced Lipford’s monthly payments from $ 640 to $ 400, saving more than $ 20,000 over the life of the loan.
“It made a big difference. It took a lot of pressure off me,” said Lipford. “It gave me more financial freedom to pay some other bills and do some things with my kids.”
Lipford is one of the 64 million Americans who are stuck on a Catch-22 credit score: they can’t get loans from banks because they don’t have enough credit history, and they don’t have enough credit history because they can’t get loans from banks .
CONSUMER PROTECTION VS. RATING COMPANIES
Reforming credit scores is one of the many priorities of U.S. President Joe Biden as he tries to repair the financial wreckage caused by the coronavirus pandemic, which has 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 precise and less discriminatory way.
Creditors currently rely on three major rating companies – Equifax Inc, Experian Plc and TransUnion – to determine credit quality. They generate a “FICO” score for borrowers, on a scale of 300 to 850, based on income, savings, assets, loans and debt repayment history. 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 loan decisions, said three sources familiar with the plan.
Such a move would require Congressional approval, but CFPB officials are already discussing how it can be configured, the sources said.
Credit reporting companies are opposed to the measure, 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 government power inappropriately and its objectives would change with political winds, the Consumer Data Industry Association (CDIA), which represents private rating companies, said in a statement.
Industry experts and consumer advocates disagree.
Nearly half of consumers in low-income neighborhoods do not qualify for traditional loans with current methods, according to the CFPB survey. A public body that uses non-traditional data can change that, experts say.
“The use of alternative data is very promising for the CFPB to accurately subscribe to people who are ‘invisible to credit’,” said Christopher Willis, a partner at the law firm Ballard Spahr who helps banks deal with consumer regulatory issues.
CHANGES IN THE WIND
The CFPB is already studying ways to make the existing system fairer. Rohit Chopra, named Biden to lead the CFPB, mentioned problems with credit scores during his testimony before a Senate committee on March 2.
Almost 60% of the complaints that the CFPB received last year were about errors and other problems with credit scores. Under Chopra, the bureau would pressure private companies to correct inaccurate information, the sources said.
CFPB officials are also discussing how to use artificial intelligence in loan decisions, the sources said. The bureau can issue guidelines to ensure that creditors can use algorithms in a way that is inclusive and does not enforce discriminatory practices, they said.
The CFPB declined to comment on any of the issues.
The bureau and other US regulators said last week that they were seeking public opinion about the growing use of AI by financial institutions.
The planned changes could help people like Andrew Ballentine, 48, a skilled worker from Cleveland, Ohio, who had his hours cut during the pandemic.
Without much credit history, Ballentine was unable to qualify for traditional creditors. Finally, the HFLA of Northeast Ohio, a nonprofit organization, offered him a $ 1,500 interest-free loan.
“If they weren’t there, I hate to think about what would have happened to me,” he said. “I probably would 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)