Fintech

As 2016 comes to a close, many in the financial services industry are trying to assess the impact the Trump administration and Republican controlled Congress will have on regulatory issues. Answers to these questions may be clearer after President-elect Trump is inaugurated on Jan. 20. However, those in the federal regulatory environment are already exploring oversight and regulation of the FinTech and marketplace lending sector. Warning on alternative credit risk models Inquiries by federal and state policymakers over the past year have centered on how FinTech and marketplace lenders are assessing credit risk. In particular, regulators have asked about how credit models different from traditional credit scoring models and what, if any, new attributes or data are being incorporated into credit risk models for consumers and small businesses. On Dec. 2, Federal Reserve Governor Lael Brainard signaled that policymakers continue to be interested in this area during a wide-ranging speech on the potential opportunities and risks associated with FinTech. In particular, Brainard warned that “While nontraditional data may have the potential to help evaluate consumers who lack credit histories, some data may raise consumer protection concerns” and that nontraditional data “… may not necessarily have a broadly agreed upon or empirically established nexus with creditworthiness and may be correlated with characteristics protected by fair lending laws.” Brainard also suggested that there are transparency concerns with alternative scoring models, saying that “alternative credit scoring methods present new challenges that could raise questions of fairness and transparency” given that consumers may not always understand what data is used utilized and how it impacts a consumer’s ability to access credit at an affordable price. Look for regulators and Congress to continue to focus on the fairness and accuracy of new credit risk models and the data underpinning those models in debates surrounding FinTech and Marketplace lending in 2017. A national charter for FinTech? Earlier this month, the Office of the Comptroller of the Currency (OCC) announced that it was considering the creation of a national charter for FinTech lenders. There has long been speculation that the OCC would offer a national charter for FinTech. Analysts have suggested that the creation of a charter could help increase regulatory oversight of the growing market and also provide additional regulatory certainty for the emerging FinTech industry. The OCC’s proposal would create a special purpose national bank charter for FinTech businesses that are engaged in at least one of three core banking activities: receiving deposits; paying checks; or lending money. The OCC will be developing a formal agency policy for evaluating special purpose bank charters for Fintech companies that will designate the specific criteria that companies applying for a charter will have to meet for approval. OCC has suggested that this will likely focus on safety and soundness; financial inclusion; consumer protection; and community reinvestment. The OCC is collecting comments on the proposed policy through Jan. 15, 2017.  

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Technology sharing can unlock a more effective strategy in fighting fraud. Experian’s multi-layered and risk-based approach to fraud management is discussed

The holidays can be a stressful time of year for consumers, and also an important time for lenders to anticipate the aftermath of big credit card spend.

Which part of the country has bragging rights when it comes to sporting the best consumer credit scores? Drum roll please … Honors go to the Midwest. In fact, eight of the 10 cities with the highest consumer credit scores heralded from Minnesota and Wisconsin. Mankato, Minn., earned the highest ranking with an average credit score of 708 and Greenwood, Miss., placed last with an average credit score of 622. Even better news is that the nation’s average credit score is up four points; 669 to 673 from last year and is only six points away from the 2007 average of 679, which is a promising sign as the economy continues to rebound. Experian’s annual study ranks American cities by credit score and reveals which cities are the best and worst at managing their credit, along with a glimpse at how the nation and each generation is faring. “All credit indicators suggest consumers are not as ‘credit stressed’ — credit card balances and average debt are up while utilization rates remained consistent at 30 percent,” said Michele Raneri, vice president of analytics and new business development at Experian. As for the generational victors, the Silents have an average 730, Boomers come in with 700, Gen X with 655 and Gen Y with 634. We’re also starting to see Gen Z emerge for the first time in the credit ranks with an average score of 631. Couple this news with other favorable economic indicators and it appears the country is humming along in a positive direction. The stock market reached record highs post-election. Bankcard originations and balances continue to grow, dominated by the prime borrower. And the housing market is healthy with boomerang borrowers re-emerging. An estimated 2.5 million Americans will see a foreclosure fall of their credit report between June 2016 and June 2017, creating a new pool of potential buyers with improved credit profiles. More than 12 percent who foreclosed back in the Great Recession have already boomeranged to become homeowners again, while 29 percent who experienced a short sale during that same time have also recently taken on a mortgage. “We are seeing the positive effects of economic recovery with the rise in income and low unemployment reflected in how Americans are managing their credit,” said Raneri. Which means all is good in the world of credit. Of course there is always room for improvement, but this year’s 7th annual state of credit reveals there is much to be thankful for in 2016.

Experian Data Breach Resolution releases its fourth annual Data Breach Industry Forecast report with five key predictions on the 2017 data breach landscape

Experian is recognized as a leading security solution provider for fraud and identity solutions in order to protect customers and financial institutions

The mortgage meltdown and Great Recession have translated into big shifts as it relates to financial services regulations. What's to come with a new administration coming soon?

In this new Telephone Consumer Protection Act (TCPA) era, calling your customers isn’t a thing of the past. It’s still okay to reach out to your clients by phone, whether to offer a new product or collect on an overdue bill. But strict compliance with TCPA rules is critical for any business that contacts customers by phone. Some of the very best ways you can protect yourself from TCPA exposure is to follow four steps when creating your dialing strategy: Customer consent: It’s important to maintain and update your customers’ contact preferences and consent to call them. Simply having a phone number on an application isn’t sufficient. Companies are required to have written permission, such as “I consent to calling my cell phone when there’s a problem …” Remember, permission may only be granted by the party who subscribes to the cellular service or who regularly uses that cell phone number. Landline or wireless?: Your database should also include the phone type for the telephone numbers you have for your customers. The dialing rules differ depending on the phone type, so it’s critical to know the type of phone you are calling or texting. Verify ownership: Ownership of cell phones should especially be validated to ensure the number hasn’t been reassigned and that the person who gave consent still owns the phone. One call can be made to a reassigned number with no liability, assuming you have no knowledge the number has changed. Repeating the action could lead to fines from $500 to $1,500 per infraction. Scrub Your Database: Have practices in place to remove any confirmed reassigned phone numbers from your database. This will help to improve your right-party contact rate and save you from potential TCPA headaches. No one disagrees that calling cell numbers is a risky business, but it can be done if you set the proper workflow in motion. Click here to learn more about Experian solutions that will help to reduce your TCPA compliance risk.

Most businesses are familiar with credit bureaus today, but myths still exist around reporting credit data. Let's examine the top three and bust them.

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The pendulum has swung again. The great recession brought a glacial freeze to access to capital. The thaw brought rapid, frictionless underwriting with an almost obsessive focus on growth and customer experience. Enter Marketplace Lenders and their more “flexible” approach to credit risk assessment. While much good has come from this evolution in financing, new challenges have surfaced – especially as it pertains to fraud prevention and credit risk management. Stacking has emerged as a particularly knotty problem in the small business lending space. Applicants have the opportunity to apply for and be approved for multiple loans in a matter of days or even hours.   Technology allows for underwriting that is at least somewhat automated and depositing often occurs within hours of approval. The speed of fulfillment is a boon for small businesses. However, it also makes it possible to be approved and draw down funds on multiple loans in quick succession. Core underwriting metrics, such as debt-to-income ratios and cashflow, are unreliable in the face of ratcheting debt from concurrent online business loans. This situation occurs because the window between the approval of the loan and delivery of the funds is much shorter than the timeframe to report the loan to credit reporting agencies and other third-party data suppliers. Not all lenders report small business loans, further compounding the problem.  Lenders’ risk and pricing strategies are hamstrung in the face of stacking, whether intentional on the part of the small business or not. If a struggling small business applies for credit and receives multiple loan offers, should we rely on their ability to resist the temptation to accept them all and use the funds wisely? No. The burden rests squarely on the credit provider to proactively address the problem. Technology-enabled frictionless underwriting underpins the online consumer loan space and facilitates a similar, yet subtly different stacking problem.  There are a large number of loan providers, with a spectrum of risk appetites and pricing strategies. This all but ensures that a consumer has access to additional loans at an ever-increasing interest rate. The underlying assumption, among the more mainstream, lower-rate providers, is that the consumer is disclosing all of their obligations – including any recent loans.  Although reporting in the consumer space is more robust and timely, it is still possible for an applicant to quickly access and draw funds on several loans within a very short timeframe, making it difficult for loan providers to get a full and complete picture of their capacity to repay the loan. The situation is further complicated by lenders at the higher risk, higher rate end of the market whose business models are structured to allow for, and perhaps even encourage, stacking by the consumer. Fortunately, there are a number of steps lenders can take to improve the situation: Contribute credit data to the credit reporting agencies. Know your customer, their industry, their market and underwrite appropriately. Develop a tailored underwriting approach that achieves a balance between frictionless customer experience and prudent credit and risk assessment. All applicants are not equal, and some require additional scrutiny and more time to underwrite. Understand the drivers and indicators of stacking. The latter point is worth emphasizing. The time to address stacking is prior to funding. This requires the lender to anticipate, identify and pre-empt stackers. There is no 100 percent foolproof remedy.  However, lenders can stack (pun-intended) the odds in their favor. For example, if an existing loan has a high balance and is delinquent, might that be an indicator of a propensity to stack? What if the business owner has applied for multiple loans, resulting in multiple inquiries, over a 45-day period? A proactive, data-driven anti-stacking strategy can yield positive results, reducing delinquency and losses. In combination with consistent comprehensive reporting to the bureaus, it can go a long way toward reducing the risk posed by this largely invisible threat.

Congress recently took several actions signaling a growing interest in regulatory issues surrounding the Fintech sector. This growing attention follows a number of recent inquiries by federal and state regulators into the business practices in the industry. Subcommittee takes a deep dive into Fintech and OML regulatory landscape In July, the House Subcommittee on Financial Institutions and Consumer Credit held a hearing entitled Examining the Opportunities and Challenges with Financial Technology (“Fintech”). Witnesses and lawmakers voiced optimism that online marketplace lending can help to expand access to capital for consumers and small businesses, but the hearing also focused on a growing schism as to whether new regulations or changes to the underlying framework is necessary to ensure consumers are protected. Some lawmakers and the witness from the American Banking Association expressed concerns that the Fintech and marketplace lenders may benefit from being outside of the supervisory scope of prudential regulators and the Consumer Financial Protection Bureau (CFPB). Witnesses from the marketplace lending industry argued that they are obligated to meet all of the same regulatory compliance requirements as traditional lenders. Rep. McHenry introduces package of Fintech bills aimed at spurring innovation In addition, Congressman Patrick McHenry (R-NC), a member of the House Republican Leadership team and the Vice Chairman of the House Financial Services Committee, introduced two bills this month aimed at spurring innovation in the Fintech industry. H.R. 5724, the Protecting Consumers’ Access to Credit Act of 2016, would clarify that federal law preempts a loan’s interest rate as valid when made. The bill is in response to the Supreme Court’s recent decision not to hear Madden v Midland, a case in which the Second Circuit court ruled that the National Bank Act does not have a preemptive effect after the national bank has sold or otherwise assigned the loan to another party.  The reading of this law has created uncertainty for Fintech companies and the banks that partner with them. H.R. 5725, the IRS Data Verification Modernization Act of 2016, requires the IRS to automate the Income Verification Express Service process by creating an Application Programming Interface (API). The legislation is aimed at speeding up and improving the automation of the loan application process. In particular, it is aimed at streamlining the process by which lenders gain access to tax transcript data. Currently, lenders may require applicants to fill out IRS form “4506-T,” which gives the lender the right to access a summarized version of their tax transcript as part of the process to confirm certain data points on their application. According to industry reports, this manual process at the IRS takes two to eight days, creating unnecessary delays for Fintech companies and banks that rely on leveraging data and technology to make faster, informed decision for consumer and small business lending Both bills have been referred to the House Financial Services Committee for review.

All customers are not created equal - at least when it comes to ability to pay. So what are the natural moments for a lender to assess?