Fixing the Blind Spots:

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Financial Literacy,

PERC and TCAI Presentation: April 23rd, 2015

Longworth House Office Building—Washington, DC

Credit Reports,

Credit Scoresand

•A non-partisan, non-profit

policy research and development institute devoted to increasing financial inclusion using information solutions.

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The Institute’s mission is to create research-based educational outreach programs to improve financial literacy and help consumers to make informed financial choices in today’s complex markets. The TCAI has focused its efforts during its first five years on educating young people how to manage their finances and make informed choices as they move into adult life.

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Is CROA Choking Credit Report Literacy?

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Released Today:April 23rd, 2015

Origins and Need for CROA

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Emergence of Nationwide Credit Reporting and Credit Scores gave rise Credit Repair Organizations (CROs)

While many CROs provided useful and legitimate services, many did not Defrauding consumers Performing services of little or no value Deceive CRAs by disputing accurate information and promoting

identity fraud

This still goes on, there is still a real need for CROA…

CROA

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The Credit Repair Organizations Act (CROA) was passed by Congress in 1996

CROA restricted CRO activities and defined CROs as: Organizations that perform service, in return for the payment of

money or other valuable consideration, for the express or implied purpose of—

(i) improving any consumer’s credit record, credit history, or credit rating; or

(ii) providing advice or assistance to any consumer with regard to any activity or service described in clause (i)

It excluded some nonprofits (501 (c)(3)), some creditors, and some depository institutions / credit unions.

very broad language!

What is covered by CROA now?Expansive court interpretation combined with broad language means all sorts of services could be considered

“credit repair” and regulated by CROA, such as…

-Credit Report / Score Education -Credit Score Simulations -ID Theft Protection-A consumer calling a CRA to see how a behavior change may impact a credit score

…really any for-pay service offered (even implicitly) as one that may improve your credit standing, credit worthiness, or credit score

What is not covered by CROA now?

-Free servicesCredit Karma Credit SesameMint

(are likely not considered covered as they receive revenue via marketing, other ways)

…but it is strange that one-on-one education or costlier services can not be offered for a fee (like so many other services / financial service) without the CROA restrictions (or fears of litigation)

What CROA Does

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Prohibits:

Making false statements to CRAs (credit bureaus) & others Perpetrating ID Fraud to CRAs & other Misleading representation of the services offered Fraud/deception with services offered

Requires (among other things): 3-Business Day waiting period before service offered Very Long disclosures, required language Disclosures on separate document / screen (needs to be

consented to by consumer)Consequences of Violations:

Total Disgorgement of involved revenues Damages Attorneys’ fees

CROA…times and needs have changed

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But 20 years ago when CROA was passed… There was barely an Internet, let alone apps and mobile solutions Likes of Equifax, TransUnion, Experian (TRW before 1996), and

FICO did not have direct-to-consumer services Many services, simulators, and education tools possible today

were not pre-1996 The importance of credit report/score education may have been

less appreciated (it was only in 1995 that Fannie and Freddie began recommending the use of FICO score)

FICO score was the first to be disclosed to consumers, and not until 2001

CROA…times and needs have changed

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Also… There was no CFPB (with UDAAP powers) 20 years ago There was no FACT Act 20 years ago, FCRA has been revised CFPB has advocated for greater consumer access to their credit

reports and scores (free scores) Director of the CFPB noted, “As public awareness grows and

spreads, people also will likely want to learn more about how to improve their credit scores and build their credit profiles in ways that will make them better managers of their financial affairs and more attractive candidates for credit.”

FTC has recommended more meaningful, interactive information for consumers by industry (interactive disclosure mechanisms, immersive online dashboard)

Q: Do CRAs Offer Useful Education Services?

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Surveys show a great need for consumer credit report and credit score education (low levels of report/score literacy)

Examples… 2005 GAO report found that “…most consumers knew what a credit

score was…but many did not know that some behaviors—such as using all their available credit—could negatively affect their scores.”

Data from a 2005 GAO report indicate that members of lower-income households, less educated consumers, and younger (18-24) and older (65+) consumers are most in need of credit report / score education

December 2014 survey conducted by Ipsos found that 44% of respondents incorrectly thought that credit reports and credit scores were just different names for the same thing

A February 2015 CFPB report based on a focus group found that “Confusion Persists” regarding score and reports

Q: Do CRAs Offer Useful Education Services?

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Case: Experian Credit Advisor For-pay service Interactive (one-on-one)…this is costly On phone with advisor while on web viewing credit report 30-45 minutes Educates consumers on their credit report and credit score (in detail) Simulates various ways consumer can raise credit score Provides advice (most effective ways to raise score) Focused on specifics of consumer’s report and score

Such high touch for pay education is certainly covered by CROA…

Consumers appear to be

better able to manage their

credit standing after the

education

What the Experian results show?

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More Capable No Change Less Capable0%

10%20%30%40%50%60%70%80%90%

100%85%

15%4%

Customer Survey – Do you feel more capable / confident managing your credit following the Credit Education?

Consumers say the education is helpful

Rise 25+ points

Rise 1-24 points

No change Fall 1-24 points

Fall 25+ points

0%

5%

10%

15%

20%

25%

30% 28% 27%

13%

21%

11%13%

26% 27%

23%

11%

Credit Advisor Group Non-CA Group

Credit Score Changes Over Four Months (PLUS score)

Credit score changes indicate the education is helpful

More large credit score rises after credit score/report in education group

Credit Score Band Changes Over Four Months (PLUS score)

Rise no change Fall0%

10%20%30%40%50%60%70%80%

26%

64%

10%13%

76%

11%

Credit Advisor Non-CA

Credit score changes indicate the education is helpful

And Results are very similar using the VantageScore

Rate of score band rises doubles after credit score/report in education group

Large drop-off in consumers signing up for education

For Example, when Credit Advisor was Free…

Of consumers that hit the Credit Advisor web page…31% advanced beyond the Credit Advisor Page

However, after hitting the “Schedule-a-Session” page only 19% advance…this page requires consumers to schedule sessions at least 3-business day in advance as required by CROA

Such large drop-offs on the “Schedule-a-Session” page seen with different price points

$19.95 Free0%5%

10%15%20%25%30%35%40%45%50%

37%

46%

Talk with a Credit Advisor now rather than wait

Perc

ent o

f Res

pond

ents

“What would have made a difference in your decision to place an order today?”

CROA restrictions have big impact on service uptake

In a survey of consumer that did not purchase Credit Advisor, it was asked…

When free, 46% said they would have taking the education if there was no wait

CROA restrictions have big impact on service uptake

3-Business Day waiting period before service offered

Very Long disclosures, required language Disclosures on separate document / screen

(needs to be consented to by consumer)

CROA Requirements:

Waiting periods (and likely the long complicated disclosures) appear to be business service killers in today’s world where consumers demand instant services and ease of use

Millions could materially benefit if CROA reformed

If CROA reform spurred credit report/score education, tools development and consumer uptake such that…

If Education reached levels of Credit Karma membership (35 million)

Based on CA numbers, 5.3 million would have 25+ pt. score rise 4.3 million would have a score band rise This could translate to annual household savings of thousands

(with mortgages, car loans, etc.)

Bottom Line: The CROA status quo could have (be having) a large negative impact

Any Harms from exempting Nationwide CRAs from CROA?

CROA Prohibits: Making false statements to CRAs (credit bureaus) & others Perpetrating ID Fraud to CRAs & otherBut these are covered FCRA, FACT Act, and CRA incentives

Misleading representation of the services offered Fraud/deception with services offeredAnd these are already covered by FTC, CFPB, “UDAAP”, State AGs

Bottom Line: No Need to Cover Nationwide CRAs with CROA…only inhibits development of interactive services with consumers

Any Harms from exempting some organizations from CROA?

(1) CROA coverage is unnecessary(1) Compelling legal and market incentives(2) Heavily regulated

(2) are in good position to provide credit educational services that consumers needshould be exempted from CROA.

More generally, and logically, organizations in which

Research Consensus Confirms Benefits of Alternative Data

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March 2015

Many Organizations Examined Alternative Data

• PERC• TransUnion• Equifax• Experian• VantageScore• FICO• LN• MicroBilt

Types of Data Examined: Utility payments, Rent Payments, Telecom Payments, Pay TV, Cable, and Underutilized Public Records

Broad Findings…A Consensus

How Big of an Issue is Credit Invisibility?

Who are the Credit Invisible?

At least tens of millions

Disproportionately low income, young, elderly, ethnic minority

What is the Risk Profile of the Credit Invisible?Somewhat riskier than average, has a smaller superprime group, but contains a large number of moderate to low risk consumers. The group is NOT monolithically high risk.

How Can Alternative Data Help Solve the Problem of Credit Invisibility?Alternative data is found to be predictive of future performance of financial accounts…alternative data can be used to underwrite credit…majority of Credit Invisible can become scoreable with alternative data

Predicting Financial Account Delinquencies with Utility and Telecom Payment Data

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April / May 2015

Alt Data is Predictive of Financial Accounts

30+ DPD Delinquency Rate or PR (July 2009- July 2010)

On time and severely delinquent Alt Data Payers (Utility + Telecom) measured prior to July 2009

0%

20%

40%

60%

80%

7.50% 10.20% 13.40%

59.80%70.00%

30+ DPD Delinquency Rate on Mortgage Accounts (July 2009- July 2010)*

Alt Data is Predictive of Mortgages

*Only includes those with an active mortgage

Never 30+ DPD on Alt Tradeline

No 90+ DPD ever on Alt Tradeline

All 1 90+ DPD on an Alt tradeline previous 12

months

>1 90+ DPD on Alt tradelines previous 12

months

0%

5%

10%

15%

20%

25%

30%

4.10% 4.90% 5.40%

22.30%

26.20%

30+ DPD Delinquency Rate on a previously Clean Mortgage Accounts (July 2009-July 2010)*

Alt Data is Predictive of Clean Mortgages

*Only includes those with an active mortgage, Clean Mortgage defined as no delinquencies reported for mortgages for the 24 months prior to July 2009

900-990 800-899 700-799 600-699 501-5990%

5%

10%

15%

20%

25%

30%

35%

40%

1.10%3.00%

8.40%

16.90%

27.10%

4.70%

11.30%

18.70%

28.30%

36.60%

Never 30+ DPD on Alt Data 1 90+ DPD on Alt Data in Past 12 Months

30+ DPD Delinquency Rate on previously Clean Mortgage Accounts (July 2009- July 2010) by VantageScore Credit Score*

*Only includes those with an active mortgage, Clean Mortgage defined as no delinquencies reported for mortgages for the 24 months prior to July 2009, VantageScore used here only includes Traditional Data

Alt Data is Predictive of Clean Mortgages after Accounting for Traditional Data

Shares of Previously Clean Mortgage Sample with / without Previous 90+ DPDs

Previously Clean Mortgage Delinquency Rates with / without Previous 90+ DPDs

Alt Data Contains New, Useful InformationThat may not be found in Traditional Accounts

Consumers with Past Alt Data Delinquencies but no Past Financial Acct Delinquencies are not seen by lenders but are higher risk…

PERC6409 Fayetteville Road

Suite 120-240Durham, NC 27713

www.perc.net(919) 338-2798 x803

Take Charge America InstituteThe University of Arizona

P.O Box 210078Tucson, AZ 85721

www.tcainstitute.org