Consumer Portfolio Services chairman and chief executive officer Brad Bradley described how the subprime finance company is going through what he called a “painful process.” While the company’s originations are down from last year, its delinquencies didn’t spike to alarming levels.
Rather, Bradley is leading CPS with patience even though Q2 originations edged up slightly on a sequential comparison but softened by nearly $100 million compared to a year earlier.
During the second quarter, CPS reported that it purchased $233.9 million of new contracts compared to $229.6 million during Q1 and $319.1 million during the second quarter of last year. The company's managed receivables totaled $2.343 billion as of June 30, an increase from $2.323 billion as of March 31 and $2.254 billion as of the end of last June 30.
“I think people probably at this point understand what we’re trying to do,” Bradley said during closing comments of CPS’ latest conference call. “I mean people who know the company and certainly know me know that we would rather be aggressive. We would rather be actively growing the company and moving forward in the world. So this is a bit of a painful process for us right now.
“But to the extent you go back to 2007 when we had a huge problem, these times that are being a little more conservative might give you a huge home run later,” he continued. “And so what we don't want to do is stick our neck out with the rest of the folks and have a problem. So we've been pretty good at avoiding them. We think we've done a lot of things right now. As we mentioned in the call, it may take a few minutes or little while to prove that out. But we have some time to do it.
“And with any luck, we’ll position ourselves very well for the next couple of years, if we just staying in there patiently for the next few quarters. And that’s what we’ve been trying to do, and certainly we are achieving that goal today. Painful hurt, maybe for some of us, who like to see the company moving surging forward rather sitting in idle. But that’s the course we’ve chosen, and we think it’s a life course, and we’ll see what happens in the next few quarters,” Bradley went on to say.
CPS generated nearly a 5 percent year-over-year increase in revenue as it rose by $5.1 million to $110.1 million. However, the company’s total operating expenses jumped 10.3 percent or $9.5 million to $102.1 million. As a result, CPS watched its Q2 earnings drop to $4.6 million, or $0.17 per diluted share, down from $7.3 million, or $0.25 per diluted share a year earlier.
While all of those metrics shifted, CPS still managed to posts its 24th consecutive quarter of positive earnings.
Overall industry view
As he often does, Bradley shared his candid assessment of how the market is behaving. His view of competition focused a bit on the strides credit unions have made in gaining market share, especially as some finance companies are backing off their origination aggression.
According to the latest information from Experian Automotive, credit unions held 20 percent of the total auto finance market after the first quarter, up from 18 percent a year earlier.
“Credit unions have done a big job of moving into the spaces in the bottom of the spectrum, and been relatively competitive in growing in this sector in the last year or two,” Bradley said. “Some of the companies are pulling back,. Some of the companies are slowing down, and a lot of that gap is being filled by some of these credit unions.”
Another topic Bradley touched on was income verification. He emphasized that CPS’ underwriting department checks consumers’ income sources before finalizing the contract.
“We do verify income in every single deal,” Bradley said. “Job verification or income verification obviously was a hot topic in the news last few quarters. It’s ironic that that isn’t more the norm in the industry, but for us it is. It’s not bad when people ask questions, and we have a really good answer.”
Other company metrics
In other parts of CPS’ latest financial statement, the company reported annualized net charge-offs for the second quarter were 7.62 percent of the average owned portfolio as compared to 6.94 percent a year earlier.
CPS also reported delinquencies greater than 30 days (including repossession inventory) stood at 9.64 percent of the total owned portfolio as of June 30, up from 8.58 percent on the same date in 2016.
And if contracts do not mature, Bradley mentioned the loan-to-value ratios CPS is pushing into its portfolio are improving. After hitting a high of 115 percent, Bradley mentioned the stat dipped to 112.74 percent in Q2.
CPS chief financial officer Jeffrey Fritz also mentioned the company enjoyed a slight year-over-year improvement in its recovery rate through its wholesale endeavors after repossession, watching the rate tick up to 35.6 percent from 35.2 percent.
In the second quarter, the company’s board of directors approved an increase to the aggregate authorization to repurchase outstanding securities by $10 million. In Q2, CPS purchased 540,793 shares of stock in the open market at an average price of $4.54. Through the first six months of the year, CPS purchased 1,102,410 shares at an average price of $4.74.
Both consumers and dealers likely want to know potential buyers’ credit standing in order to facilitate delivery, and a new product fueled by CoreLogic and Equifax rolled out on Wednesday aims to accomplish that objective.
Analytics and data-enabled solutions provider CoreLogic launched BuyerConnect; a solution powered by Equifax that can be posted on a dealer’s website to help convert anonymous web traffic into qualified leads.
BuyerConnect can allow consumers to receive a free Equifax Risk Score directly from a dealer’s website and instantly see if they likely meet minimum credit requirements for auto financing.
To start the credit scoring process, the consumer only enters their name, address, email and phone number — no social security number. This basic information is sent to the dealer as a lead generation tool, whether or not the consumer completes the process.
Once the consumer receives their score, they can decide if they want to send their credit score range to the dealer to facilitate the shopping and financing processes by simply consenting to share the information. This process posts a soft inquiry to the consumer’s credit report so there is no impact to the consumer’s credit score, according to the companies.
In addition, the dealer’s website administrator can attach information regarding the page where the customer engaged with BuyerConnect. This information can include what vehicle the consumer is interested in, what advertisement the consumer responded to, or information about trade-ins.
“As more and more consumers do their research online, automotive dealers need a tool that gives them a competitive advantage by helping them convert website traffic into showroom floor traffic,” said Andrew Price, vice president of transportation services at CoreLogic.
“BuyerConnect helps dealers not only better engage with these potential customers, but also verify the identity and credit range of prospects that visit their website, so they know they are contacting leads that are interested and super-qualified.”
Equifax vice president dealer services John Giamalvo, “With auto finance incentives at all-time highs, driving new-car sales and continuing to accelerate in used and CPO programs, CoreLogic’s BuyerConnect gives dealerships the ability to engage customers by offering them an Equifax Risk Score, which provides an early gauge of meeting those credit requirements.”
With contract holders’ ability to pay paramount, 700Credit now is offering Income PreCheck, an instant income and employment verification solution that can help dealerships verify buyers' stated income and employment.
The verification is derived by accessing The Work Number, a database of employer-provided income and employment information from Equifax Workforce Solutions.
To help dealers gain a more accurate understanding of a customer's financial standing, 700Credit explained instant income and employment verifications provide information such as employer name, employment status, job title and an annualized income calculation.
The Work Number, which includes payroll records from more than 8,500 employers nationwide, including more than 82 percent of the Fortune 500 and the majority of federal government civilian employers, is a proven verifications solution in the auto industry.
“Being able to verify income and employment information at the front end of the finance process improves the consumer experience by making the transaction process seamlessly with fewer roadblocks to financing,” said Ken Hill, managing director of 700Credit.
“Knowing a consumer’s exact income helps determine their eligibility for financing. A dealership's F&I Manager can work with the buyer to come up with the appropriate terms and conditions of a loan that meet lender guidelines and fit the buyer’s budget,” Hill added.
In addition to confirming basic income and employment information, dealers can use verifications to view job tenure, which can provide additional insight into repayment risk beyond what a credit score alone reveals. Equifax research shows that consumers whose job tenure is one year or less are almost twice more likely to go delinquent on a vehicle installment contract than consumers who have a job tenure of 10 or more years.
For more information about instant income and employment verifications, visit www.700credit.com.
With interest gaining steam toward combating fraud, PointPredictive landed funding from Mosaik Partners, an expansion-stage venture capital fund, to enhance its efforts as a provider of fraud solutions to banks, lenders and finance companies.
PointPredictive announced on Wednesday that the company finalized the successful closing of Series A funding earlier this month. While no specific figures were disclosed, Mosaik Partners led the funding round as part of its initiative to invest in commerce-enabling technology companies.
“With fraud losses reaching historically high levels here in the U.S., we believe PointPredictive’s technology and consortium approach will become the standard in lending fraud detection,” said Miles Kilburn, a partner at Mosaik.
“What interested us in PointPredictive is that they have a proven management team, differentiated technology, a working solution that delivers a compelling ROI to their clients, and explosive growth potential with lenders lining up to participate. This fits right in with our investment profile,” Kilburn continued in a news release.
As part of the funding, Mosaik will take a minority interest in PointPredictive. Additionally, Kilburn will join the board of directors of PointPredictive to help the company continue to grow strategically.
PointPredictive will use the funding to respond to the growing demand for Auto Fraud Manager and Dealer Trace — solutions that can help finance companies uncover fraud patterns through a collaborative data consortium and machine learning. PointPredictive estimates between $4 to 6 billion in auto loan applications may have misrepresentations that lead to default and chargeoff. Auto Fraud Manager and Dealer Trace can help curb those losses by leveraging sophisticated algorithms that scan and score applications prior to loans being funded.
“Auto lenders want to collaborate to stop fraud,” PointPredictive chief executive officer and president Tim Grace said. “In the last six months, we’ve seen tremendous interest in our solution and we need to respond now to help lenders stop auto lending fraud.
"Mosaik Partners is the perfect investor — they understand our technology and have worked in our space for years,” Grace continued. “We’re using the funding to increase our team of fraud scientists, fraud experts and industry thought leaders that will help us revolutionize fraud detection in auto lending and beyond.”
Carfax and MeridianLink recently teamed up to make it easier for auto finance companies to get Carfax Vehicle History Reports.
Using MeridianLink’s LoansPQ loan origination system (LOS), officials highlighted this week that thousands of auto finance companies now can order Carfax reports with one simple mouse click. With direct access to valuable Carfax information such as title brands, mileage readings and service history, plus the new VIN-specific Carfax History-Based Value, finance companies can more accurately assess vehicles as collateral.
“Simplifying and streamlining loan processing for our clients is our top priority,” said Doug Glagola, vice president of enterprise solutions at MeridianLink.
“This integration with Carfax is a much-anticipated benefit that makes critical vehicle history and value information impacting a loan available without having to leave the LoansPQ platform,” Glagola continued in a news release.
Carfax information can help finance companies identify vehicles with potential problems that affect their safety and value. Issues such as accidents and flood damage, or scams like odometer fraud and title washing can reduce vehicle values by as much as 50 percent, lead to more costly repairs and increase the risk of contract default.
Using Carfax Reports and the Carfax History-Based Value — a price based on a vehicle’s unique history — finance companies can adjust their loan-to-value ratio.
“We’re constantly developing innovative solutions that help protect members of the financial services industry and their customers,” said David Lackey, general manager of the Carfax banking and insurance group.
“Most often, auto lenders look primarily at the individual requesting a loan, but evaluating the specific vehicle on a lending application is a truly novel concept,” Lackey continued. “Working with partners like MeridianLink, we’re transforming the way lenders approach the loan approval process.”
Carfax is a leading provider of vehicle history information and solutions to auto finance providers, serving thousands of banks and credit unions nationwide. Carfax information can help finance companies in underwriting, fraud detection, title research, skip-tracing and remarketing.
Mark Floyd is the current and Steve Hall is the immediate past president of the National Automotive Finance Association.
In their own ways, both Floyd and Hall conveyed to the attendees of the NAF Association’s 21st annual Non-Prime Auto Financing Conference how the organization resembles a community with members who are more like friends than just industry participants or even competitors.
“I always considered Steve one of the thought leaders in our organization,” Floyd said during the opening segment of Thursday’s conference activities. “I didn’t always agree with him, but he’s someone who I would consider that makes us think outside the box.”
While Hall couldn’t attend this week’s gathering, he shared a note with NAF Association leadership that Floyd shared in part. Hall used some terminology that triggered this reaction Floyd acknowledged: “When I first read that I thought, ‘Really, Steve?’ … Then I thought, he’s got something here.”
What Floyd initially questioned was Hall trying to convey that the NAF Association should generate a “tribal culture.” Hall’s reasoning stemmed from what members are facing nowadays — particularly finance companies that operate in the non-prime and deeper portions of the credit spectrum. The trials include rising delinquencies, a potential reduction in capital availability as well as the ongoing pressure to perform by stakeholders and regulators.
Floyd turned back to Hall’s note, telling several hundred attendees, “As we think about some of the challenges we’re facing today, we’ve seen most of them before. So we should be thinking about what tools, analytics, educational programs and content we can give our members to help them be successful, which (NAF Association executive director Jack Tracey) and the team have done a really great job of.”
Floyd continued with Hall’s sentiment, saying, “I think there is an opportunity to create a tribal culture within our membership where people feel a part of group that has common values, beliefs, customs and rituals — interesting choice of words — about how the subprime industry should function. We can create a community where people come together to help each other be successful. That’s really what we do here.”
While the NAF Association has hosted this event filled with training and updates on regulatory matters, industry trends and networking for more than two decades, Floyd recalled the first time he attended this conference.
“I think it was 1996,” Floyd said as he gestured from behind a lectern adding, “We could fit everybody in half of one of these sections; it was about 25 or 30 people.
“I remember thinking I’m not really sure I want to be part of this group,” Floyd continued. “And I’m glad I’ve been part of the group. We’ve grown friendships and we’ve grown a community. It’s really a nice group to be a part of.
“I feel like the conversations I have with everybody, we really are looking out for each other. That’s that tribal community Steve was talking about. I feel that and that’s a genuine feeling. I feel that from people I talk with in the industry,” Floyd went on to say.
Thursday’s activities included a back-and-forth conversation involving Calvin Hagins, deputy assistant director for originations at the Consumer Financial Protection Bureau, and Michael Benoit, who is chairman at Hudson Cook. Panel sessions about capital availability and a major accounting change associated with reserving for potential losses as well as the final conference presentation by retiring Cox Automotive chief economist Tom Webb filled the day.
Floyd agreed with the closing portion of Hall noted when he shared that the NAF Association is “where people feel they are a part of a group of like-minded and valued leaders who are committed to helping each other pursue greatness in their businesses.”
Editor’s note: More expert analysis from the 21st annual Non-Prime Auto Financing Conference will be included in future reports distributed through SubPrime News Update.
Westlake Financial Services this week finalized a partnership with eOriginal in an effort toward what the companies classified as the path to digitally transform the finance companies' dealer management system into an eContracting solution.
The move is geared to improve the customer experience, and increase efficiency and accuracy, while accelerating the financing process from days to hours.
“In the continuing evolution of auto lending, Westlake Financial is positioned to capture the full value of digital transformation across the financial services spectrum by adopting our digital asset management platform,” said Brian Madocks, chief executive officer of eOriginal. “Westlake Financial has now moved ahead of the industry and become a true innovator.”
An internet-based, privately held finance company that specializes in the acquisition and servicing of prime to subprime automotive retail installment contracts, Westlake Financial Services has paired eOriginal’s eAsset Management technology with DealerCenter, a leading dealership management system and loan submission platform for independent dealers in the United States.
The companies said the solution can allow both independent and franchised dealers to sign contracts electronically, upload supporting documentations and instantaneously push the information to Westlake as soon as the loan package is complete.
“Our two most important customer groups are dealerships and car-buyers, and with electronic contracting we can serve them both better,” said Casey Harmon, Westlake’s senior vice president of corporate development.
“The DealerCenter eContracting solution is a more efficient, accurate process for our dealer network, and we think customers will enjoy the simplicity,” Harmon continued.
Headquartered in southern California, Westlake originates indirect retail installment contracts through a network of more than 20,000 new and used car dealers throughout the United States.
Harmon also noted, “This seamless transfer of contract data drastically reduces the time it takes to receive a complete funding package, and allows our acquisitions team to start working deals faster. Several dealers have experienced same-day funding through Westlake’s eContracting solution.”
By connecting digital loan origination systems and dealer management systems, eOriginal emphasized that funders can more rapidly link with dealers and, in some cases, complete the financing process before the borrower even drives off the lot in their new vehicle, which empowers dealers to improve operational efficiencies.
With the selection by Westlake, eOriginal insisted that the development further solidifies its position as a leading digital transaction solution for the vehicle finance industry by providing a single platform that enables eSignature, secure vaulting and transfer to the secondary market.
Not long after launching its lending and leasing as a service (LLaaS) product powered by Oracle, technology services and consulting company DecisivEdge articulated what the firm believes are the six “must haves” when auto finance providers are considering loan origination software (LOS).
DecisivEdge senior vice president of business optimization Andrew MacDowell used automotive imagery when explaining that he wanted to take a “look under the hood” of loan origination software on the market today and study the many “moving parts” designed to meet the rigorous requirements of diverse finance companies with the key objective of strengthening customer and dealer relationships, mitigating risk, and streamlining day-to-day operations.
MacDowell arrived at the six “must haves” and initially mentioned them in a blog post shared with SubPrime Auto Finance News.
1. Compliance
MacDowell insisted standalone software will not assure compliance, but should provide the solution to execute with confidence. He emphasized that compliance calculation and Truth in Lending Act (TILA) disclosures must be compliant.
“Origination software should assist in storing copies of key documentation: including appropriate disclosures and contracts, all documents must be in compliance with the Electronic Fund Transfer Act including electronic fund transfer pre-authorization, disclosure documents, transaction history, application denials, adverse action notices, procedures of less favorable terms, and loans subject to risk-based pricing regulations,” he said.
“Additional software capabilities include generating appropriate notices to customers, and single electronic fund transfer transactions in compliance with EFTA Regulation E,” he continued.
2. Credit Scoring and Auto-Decisioning
MacDowell contends that a state-of-the-art LOS should replace the manual processes of requesting and analyzing credit bureau requests by automatically parsing the credit reports into useful financial information that can be used for automated scoring and decision-making.
He explained that the system should support manual re-scoring of the credit application if another credit bureau report is pulled, or if another scoring model is processed.
“Credit analysts should also have the ability to specify if a credit bureau report is not required. Ideally, the platform would also provide a highly configurable user-defined scoring model that can be setup for each product you are offering and a scoring engine built into the application should use data attributes from both the loan application and the credit bureau report,” MacDowell said.
“The system should support auto-decisioning as well as manual decisioning,” he continued. “Based upon the risk model setup, lenders should look for platforms that can compute a custom credit score for the application and assign a credit grade. The credit grade can then be used to auto-decision the application or be queued to an underwriter for further manual review."
3. Risk-Based Pricing
MacDowell suggested that finance companies must have a platform that helps facilitate the setup of pricing scenarios based on the provider’s credit policies. He noted different pricing rules should be defined based on parameters such as product, state, dealer, credit grade, contract amount and asset/collateral.
“The pricing setup can be configured in a number of ways with multiple attributes to provide flexibility,” MacDowell said. “The system should recommend ‘best-match’ pricing based upon the application parameters and conform with the institution’s pricing strategy during setup configuration.
“With the auto-decision process, the system can assign a price based on the credit risk of the application,” he went on to say. “In order for efficient processing and data integrity, the uploading of the pricing records from a data file is also supported. This functionality is critical in light of increasing challenges in the auto lending and leasing industry this year.”
4. Multi-Channel Triggers
MacDowell pointed out that finance companies require the key capability to trigger originations in real time, utilizing any consumer banking channel, including mobile, web, telephone, fax, internet or the dealer/branch.
With the convenience and security of a cloud-based solution, MacDowell explained applications can be received, customer credit immediately calculated, and lending decisions concluded automatically or manually.
“Default stipulations should be integrated into the application to allow the lender immediate opportunity to effect a leveraged plan or a decision based on market performance and compliance,” he said.
5. Flexibility of Product Offerings
MacDowell acknowledged that the ability to offer secured or unsecured loans, leases, loans or lines of credit can be a lengthy process without continual compliance to prevailing Consumer Financial Protection Bureau compliance policies and market trends.
MacDowell also mentioned customer status changes, daily interest margins and competitor’s rates are among the key concerns to consider with product offerings. He recommended that they should be integrated into a well-built lending platform.
“With ‘all bases covered,’ product offerings can be validated, tested and brought to market at a faster pace,” MacDowell said.
6. Straight-Through Processing
Streamlining the receipt, analysis, and processing of loan applications allows for more efficient transactions, according to MacDowell.
“By removing the requirement for manual data reentry and enabling the simultaneous distribution of information, such automation lends itself to the elimination of costly processing delays,” he said. “Quick processing of adjudication is important to facilitating lender turnaround responses.
“A major benefit of streamlining lending platforms will result in a consistent, precise and more thorough transaction process,” MacDowell went on to say. “This ultimately leads to generating the right credit decisions delivered at the right time to the right customer.”
MacDowell closed his discussion by making one more point.
“Be diligent as you assess your prospective implementation partner before making your decision. You will want to ensure the prospective implementation partner has the expertise to deliver both technical and servicing requirements,” he said.
DecisivEdge’s solution powered by Oracle
As previously mentioned, DecisivEdge, which also is a gold-level member of Oracle PartnerNetwork (OPN), recently announced the launch of its lending and leasing as a service (LLaaS) product, powered by Oracle. DecisivEdge highlighted LLaaS is designed to be a simple, flexible, securely featured and cost-effective way for small and medium-sized finance companies to leverage the capabilities of a world-class solution.
Oracle Financial Services Lending and Leasing (OFSLL) is at the core of DecisivEdge’s offering. It is hosted in a securely featured cloud and bundled with 24/7 monitoring, support and other value-added services.
The company indicated the service is priced based on account volume and service levels selected by the subscriber. This simplifies adoption and dramatically reduces the cost of entry. DecisivEdge is onboarding its first customer, a midsized lessor of residential HVAC equipment to the platform and is working with several other interested lenders.
“We are extremely excited to be working with Oracle to bring this innovative solution to the marketplace,” MacDowell said. “The traditional model requires a sizable up-front capital expense to acquire the software and infrastructure, often putting such a solution out of reach for small and medium-sized lenders.”
Andrea Klein, vice president of alliances at Oracle Financial Services, added, “We are delighted to collaborate with DecisivEdge to offer an innovative solution alternative to our customers.
“We look to work with progressive companies such as DecisivEdge to bring to clients the solutions they need to differentiate, enhance and grow their businesses,” Klein went on to say.
Automotive Personnel chief executive officer Don Jasensky acknowledged one of the most difficult challenges during the candidate-evaluation process is to determine whether the individual seeking the position at your firm actually can handle all of the demands and responsibilities asked of the post.
Harkening back on nearly three decades of experience, Jasensky arrived at five suggestions hiring managers and other company decision-makers can use to decipher what the candidate might truly be like.
“In 28 years of executive search, no one has ever asked us for an average candidate,” Jasensky said in a recent note to SubPrime Auto Finance News. “Clients come to us when they are looking for a ‘high performer.’ The higher level the position the more important their competency is.
“As an example, a director of credit impacts a company much more than one credit underwriter,” he continued. “The higher up the food chain the more critical competency becomes.”
Jasensky insisted that the best indicator of future behavior is past behavior.
“Human behavior is fairly consistent throughout our adult lives,” he said. Winners show themselves early and consistently throughout their careers. Laggards do, too.
While learning about competency is part of the interview, evaluation and reference-checking process, Jasensky noted that companies should keep these five factors in mind:
1. What are your performance standards with your current position?
2. How are they measured?
3. How are you doing with them?
4. Show me: awards, commission checks, reference letters, etc.
5. References: trust but verify
“Knowing what you are looking for at the start of your search will add direction and confidence in your decision making,” Jasensky said.
Jasensky plans to discuss this topic and more during a presentation during the National Automotive Finance Association’s 21st annual Non-Prime Auto Financing Conference.
This year’s event, which carries the theme, “Optimizing NonPrime Performance,” is scheduled to run from May 31 through June 2. The event again is to unfold in Plano, Texas, but at a new facility — the Hilton Dallas/Plano Granite Park.
Some of the conference sessions include the release of the 2017 Non-Prime Auto Financing Survey as well as a discussion about how finance companies can raise capital. Another segment has the title, “CFPB in Their Own Words.”
Among some of the notable conference speakers scheduled to appear are:
■ Rep. Jeb Hensarling, a Texas Republican and chairman of U.S. House Financial Services Committee
■ Tom Webb, retiring chief economist at Cox Automotive
■ Amy Martin, senior director of the structured finance ratings group at Standard & Poor’s
Complete registration details for the 21st annual NonPrime Auto Financing Conference can be found at www.nafassociation.com.
As the Consumer Financial Protection Bureau takes a closer look at alternative data, the American Bankers Association delivered an eight-page comment letter containing a half dozen suggestions about the current and potential use of alternative data and modeling techniques in the credit process.
Along with the suggestions, ABA also raised regulatory concerns, especially when using alternative data might trigger the CFPB to take action for what the bureau could allege as unfair, deceptive, and abusive acts and practices (UDAAP).
Authoring the material was Nessa Feddis, the association’s senior vice president and deputy chief counsel for consumer protection and payments. Feddis began by outlining a foundation of ABA’s stance regarding alternative data.
“As a general matter, banks support the use of alternative data sources to evaluate credit applicants, particularly people with no or ‘thin’ credit files who may be eligible for credit,” Feddis wrote. “The use of alternative data, coupled with mobile channels of access to bank products and services, may have potential to expand financial services and open the door to people who otherwise have limited or no access to mainstream credit.
“However, banks have concerns about the reliability and predictability of some alternative data and about consumer protections promoting privacy and data security,” she continued. "In addition, it should also be emphasized that banks recognize the importance of fair lending and demonstrating that underwriting models are sound.”
Feddis then went into six suggestions that could quell concerns about UDAAP allegations among other aspects of leveraging this technology. The recommendations included:
1. Alternative data providers should be sensitive to consumer privacy and data security and ensure that data are accurate and reliable.
2. Regulators must recognize that application of disparate impact liability in supervision and enforcement causes banks to retreat from using alternative data, limiting inclusion and competition.
3. To promote the use of alternative data in mortgage lending credit decisions, regulators should provide guidance on how banks can test and demonstrate that models comply with the Fair Housing Act’s disparate impact liability, consistent with the Supreme Court’s Inclusive Communities framework, and also meet supervisory safety and soundness expectations about model validation.
4. Regulators must also recognize that the persistent threat of an undefined UDAAP sanction hovers like a dark cloud over financial innovation and will cause banks to retreat from using alternative data.
5. A supervisory approach that reduces banks’ compliance risk will encourage banks to use alternative data as a tool to develop products, especially small dollar loans, designed for people who may not qualify under traditional underwriting standards.
6. The bureau should reconsider its Project Catalyst and No Action Letter policy to promote testing of alternative data and foster innovation without the risk of triggering fair lending and UDAAP liability.
“Banks are enthusiastic, but cautious, about using alternative data and models to innovate and improve customer access to credit and product affordability,” Feddis wrote to close her letter to the CFPB.
“A number of factors impede experimentation and use of alternative data,” she continued. “Fair lending, UDAAP, and model validation challenges, risks and costs are primary obstacles. Lack of assurance about the predictability, reliability and accuracy of the data as well as privacy and data security concerns also cause banks to hesitate.
“Simply put, the compliance and reputation costs and risks can overwhelm the uncertain return,” Feddis went on to say in the letter available here.
