CFPB Issues Report on “Credit Invisible” Consumers

Yesterday the Consumer Financial Protection Bureau (CFPB) issued a report titled “Credit Invisibles” (link to report). The report concludes that one in 10 adults in the United States, or about 26 million consumers, are “credit invisible.” Consumers that are credit invisible do not have a credit history with any of the three nationwide credit reporting companies (Equifax, Transunion or Experian).

The report further notes that an additional 19 million Americans (8.3% of the adult population) have credit histories containing insufficient or stale information.  Insufficient or stale information causes those consumers to be “unscored” by a commercially available scoring model that is used with most credit scores, such as FICO or VantageScore.

The 37-page report was the result of a research project undertaken by staff in the Office of Research of the CFPB to better understand how many consumers are either credit invisible or have unscored credit records and what the demographic characteristics of such consumers are.

The report goes into great detail discussing the demographics behind the raw numbers. Roughly 45% of consumers in low income neighborhoods are either credit invisible or have unscored records.  That compares to a 9% combined figure in higher income neighborhoods. The report further states that Blacks and Hispanics are far more likely than Whites or Asians to be credit invisible or to have unscored credit records. Not surprising is the additional finding that most consumers that are credit invisible or that have unscored credit records are young (i.e., younger than 25).

The report’s conclusion is hardly a revelation: Consumers with limited credit histories generally have a harder time obtaining credit because many traditional lenders do not extend credit to consumers without a scored credit record, or, if they do, it is only in very narrow circumstances (and usually at a higher cost to the consumer).

In CFPB Director Cordray’s prepared remarks regarding the report he mentions the many significant negative implications to consumers, including: 1) ability to obtain mortgages and the interest rates paid, 2) eligibility for credit cards, and, 3) potential employers and landlords using credit reports in hiring or rental decisions.

It is interesting to note that two items are barely mentioned in the report. First, the use of “alternative data” for developing credit scores merited only a footnote discussing efforts by FICO, LexisNexis and VantageScore to expand the number of consumers whose record could be scored. Alternative data could include such things as utilities, rent, and health club membership data.  These programs could have a significant positive impact on the consumers currently identified as invisible or unscored.

Second, with all of the recent publicity regarding payday loans, title loans, and other alternative sub-prime lending, it was surprising that the report did not provide data on the impacted consumers being forced to utilize those products.

Finally, left unsaid is what next steps the CFPB will take now that this report has been published.