April 8 (Reuters) – A chance conversation with a client saved Vincent Lipford, a freelance hairstylist in Memphis, Tennessee, over $ 20,000.
The 51-year-old single dad was stuck in a subprime auto loan with an annualized interest rate of 25% because he lacked the credit history that would allow him to obtain financing from traditional lenders. The interest would have cost him almost as much as the Kia Forte itself if he had followed the payment plan to the end.
When Donald Hall, regional vice president of Hope Credit Union, took a walk on a Saturday for his weekly haircut, he was alarmed to learn of Lipford’s situation. He helped refinance the loan into one that has an interest rate of just 4.2%, based on his history of paying cell phone and utility bills – factors that companies that determine credit scores and banks ignore them.
The changes reduced Lipford’s monthly payments from $ 640 to $ 400, saving over $ 20,000 over the life of the loan.
“It made a huge difference. It took a lot of pressure off me,” Lipford said. “It gave me more financial freedom to pay other bills and do certain things with my children.”
Lipford is one of 64 million Americans who are trapped in a credit scoring Catch-22: They can’t get loans from banks because they don’t have a sufficient credit history, and they don’t have a sufficient credit history because they can’t get loans from banks.
CONSUMERS VS RATING FIRMS
Credit rating reform is one of US President Joe Biden’s many priorities as he attempts to undo the financial wreck caused by the coronavirus pandemic, which has caused disproportionate damage to minorities, women and workers across Canada. low income, according to government data. During his campaign, Biden spoke of creating a public entity that would determine credit scores in a more accurate and less discriminatory manner.
Currently, lenders rely on three major rating companies – Equifax Inc (EFX.N), Experian Plc (EXPN.L) and TransUnion (TRU.N) – to determine creditworthiness. 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 such as rent and utility payments into loan decisions, three sources familiar with the plan said.
Such a move would require congressional approval, but CFPB officials are already discussing how it could be put in place, the sources said.
Credit bureaus are opposed to the move, saying they are already striving to provide fair and affordable credit to all consumers. A public credit bureau would be bad for consumers because it would inappropriately extend government power and its goals would change with political winds, said the Consumer Data Industry Association (CDIA), which represents private rating companies, in a statement. communicated.
Industry experts and consumer advocates disagree.
Nearly half of consumers in working-class neighborhoods are not eligible for traditional loans using current methods, according to a CFPB study. A public entity using non-traditional data could change that, experts say.
“The use of alternative data holds great promise for the CFPB to accurately guarantee people who are ‘invisible credit’,” said Christopher Willis, partner at the Ballard Spahr law firm which helps banks solve debt problems. consumer regulation.
CHANGES IN THE WIND
The CFPB has already looked into ways to make the existing system fairer. Rohit Chopra, Biden’s candidate for head of the CFPB, spoke of credit rating issues during his testimony before a Senate committee on March 2.
Almost 60% of complaints received by the CFPB last year concerned errors and other issues with credit scores. Under Chopra, the office would push private companies to correct inaccurate information, the sources said.
CFPB officials are also discussing how to use artificial intelligence in lending decisions, sources said. The office can issue guidelines to ensure lenders can use algorithms inclusively and don’t reinforce discriminatory practices, they said.
The CFPB declined to comment on either issue.
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 saw his hours cut during the pandemic.
Without a great credit history, Ballentine was unable to qualify with traditional lenders. Eventually, the Northeast Ohio HFLA, a nonprofit organization, offered him an interest-free loan of $ 1,500.
“If they weren’t there I hate to think about what would have happened to me,” he said. “I probably would have been kicked out.”
Reporting by Matt Scuffham in New York
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