Comments to the Consumer Financial Protection Bureau
Defining Larger Participants in Certain Markets for Consumer Financial Products and Services Markets [Docket N. CFPB-HQ-2011-2]
Demos welcomes the opportunity to respond to the Consumer Financial Protection Bureau's Notice and Request for Comment concerning the Bureau's definition of larger non-bank participants in markets for consumer financial products and services.
Because the financial services landscape changes quickly and risks to consumers are constantly shifting, we urge the CFPB to adopt a flexible, broad standard that can respond to changes in the marketplace and ensure that risky actors do not evade supervision.
Consumers benefit from the fact that The Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203) offers a flexible framework for the CFPB to define its supervisory authority, enabling the Bureau to evaluate which non-banks present potential risks to consumers in a range of ways. Adopting a flexible, broad definition of a "larger participant" will allow the Bureau to effectively carry out its mandate under the statute and respond quickly to marketplace shifts that produce new risks to consumers. A broad definition will also promote even-handed regulation, creating a level-playing field in the financial marketplace as all non-bank competitors become aware that they could potentially face the Bureau's supervision. Once the Bureau defines a broad scope for supervision, it should exercise its authority judiciously, assessing risk when determining which entities to actually supervise and how frequently.
Demos' recent research has focused on the consumer reporting industry, and we strongly agree that the CFPB should include consumer reporting in the initial rule. Indeed, consumer reporting can be seen as an exemplar of the rapidly changing consumer marketplace: credit reports and scores that were initially developed to evaluate the risks of lending to a particular consumer have been adapted for use in a wide range of other consumer contexts in which their predictive value is dubious or unclear. Landlords, insurance companies, public utilities, and even employers now use credit reports for decision-making with significant impacts on consumers' economic well-being. At the same time nationwide specialty credit reporting companies are promoting a variety of consumer records, including information of dubious relevance such as gym membership and magazine subscription data, for lending and non-lending financial purposes with substantial potential impacts on consumers.
The consumer reporting industry is particularly in need of CFPB supervision due to its failure to meet basic standards of fairness and accuracy articulated in the Fair Credit Reporting Act, putting American consumers at risk. Reports and scores exclude relevant information, include inaccurate information, and contain data about medical debt collections that reveal more about an individual's private health concerns than their overall credit worthiness. Credit reports largely mirror racial and economic divides, with African Americans and Latinos disproportionately likely to have lower scores. In turn, consumers in these communities are more likely to be offered high-priced loan products, which may contribute to more defaults, maintaining and amplifying historical injustice. Finally, credit reports are composed exclusively of information about individual consumers, but consumers lack unrestricted access to relevant credit information and must often pay fees to obtain their own credit scores. As the CFPB's own initial research has concluded, differences between consumer- and creditor-purchased credit scores can lead to potential consumer harm.
With reference to the consumer reporting industry and other non-bank providers of financial products and services, we recommend that the Bureau adopt the following criteria for determining which non-banks should be defined as "larger participants":
- Consider both absolute and relative size thresholds, enabling the Bureau to protect consumers from both large non-banks and non-banks that are large relative to others in niche markets and markets that may be new and growing.
The three nationwide consumer reporting agencies, Transunion, Experian, and Equifax should unquestionably be considered "larger participants" in the market for consumer financial services and products. Each of these corporations maintains 200 million credit files on American consumers, selling more than 2 million reports each day. Their products have a direct and growing impact on Americans' economic security and opportunity, determining whether a consumer will end up paying a higher interest rate for a loan or a higher premium for car or homeowner's insurance; have their application for a loan or insurance denied; be turned down for a job, or even be terminated from their current one. Credit reports and scores produced by these companies can affect the way Americans are treated by landlords, utility companies, and hospitals.
The component parts of the industry also merit consideration: major companies such as FICO and VantageScore that assemble credit scoring models and create the credit scores relied upon by these agencies should also be considered "larger participants" and supervised by the CFPB. Nationwide resellers of consumer reporting information should also be defined as "larger participants" and subject to supervision due to their role in supplying consumer reports to lenders or other purchasers of consumer data.
Nationwide consumer reporting agencies that compile and maintain files focused on consumers' insurance claims, medical records, history as a tenant, and check writing history should also be defined as "larger participants" based on their significance for consumers making purchases in a given industry.
- Encompass large companies that sell multiple types of consumer financial products and services, even if they are not major providers of a single service or product.
In the case of the consumer reporting agencies, many companies offer a range of consumer reports that are considered financial products under the Fair Credit Reporting Act as well as some that are not. The CFPB should define these entire companies as larger participants and supervise all of the database and information products about consumers sold by these companies. This broad designation will protect consumers from evolving risks in the way this information is used and will reflect the way that these consumer reports are mixed together and used by the same banks, creditors, insurance companies, other businesses.
- Consider non-banks' regional impact as well as their national influence.
The CFPB should act to safeguard consumers wherever they live, protecting consumers who are not currently being shielded from violations of federal law by larger non-banks. In particular, the CFPB must act to ensure that non-banks cannot violate federal law simply because they operate primarily in states that have fewer law-enforcement resources.
Demos appreciates the opportunity to comment on the rule defining larger non-bank participants.
Should you wish to discuss these issues further with our office, please contact:
Senior Policy Analyst, Economic Opportunity Program, Demos
220 Fifth Avenue, 2nd Floor New York, NY 10001