Upcoming Changes to the Credit Industry: Part Two

The credit industry is evolving, and many of the changes are happening right under our nose. We've already discussed the growing popularity of the VantageScore in our first post, and we will explore more about the conflict of interest associated with the changing dynamics of credit repair in our next, but for now we are focusing on your rights as a consumer (specifically your privacy rights). 

In order to get a better understanding of the gravity of this situation, we should understand the roots of the problem, starting way back in the early 1800's. Before you had a financial big brother and monopolized credit bureaus, retailers and banks used feedback from the community to assess your character and risk. As consumer lending became more popular in the early 1900's, retailers and banks took that process a bit too far... 

Early "credit reports" were unreliable, and as Sean Trainor puts it in his TIME article..

"These early reports were incredibly subjective. As such, they were colored by the opinions of their predominantly white, male reporters, as well as their racial, class and gender biases."

These practices of determining credit worthiness would now be a direct violation of consumer privacy rights. Many credit reports contained information regarding a consumer's sexual orientation, hygiene, and drinking habits and were used as factors in the loan risk assessment. As the rising tide of consumers fighting (and suing) these credit companies grew, so did the access to lending for consumer based goods.

Naturally, the growth in consumer lending created a greater need for consumer financial data. It became rare for retailers and banks to finance their own due diligence on consumer history and habits, and they started to rely more heavily on reporting agencies. Before the FCRA, these reporting agencies were unregulated, and rarely checked in the legal system for their overreaching patterns of collecting consumer data.

Now, fast-forward to 2016. We have stronger consumer privacy rights, more comprehensive regulations on the credit reporting agencies, and more consumer debt than we know what to do with. What could change?

"Could a Bank Deny Your Loan Based on Your Facebook Friends?"

The headline of "Could a Bank Deny Your Loan Based on Your Facebook Friends" was not a hoax. In fact, it was a very well written article in the Atlantic documenting the patented process that Facebook created to identify your creditworthiness as a consumer based on your Facebook activity. 

Don't believe me? Here's the patent information...

Both millennials and jaded consumers are making it difficult for lenders to approve loans. Between a lack of recent credit and an lack of drive to fuel the American Dream, lending to credit invisible consumers is becoming a big problem for banks and lending institutions.

This comes at a bad time, because your credit report is more accessible than ever before.

With a growing population of consumers relying more on cash in hand and avoiding credit, banks and other institutions are looking at more creative ways to identify your risk as a consumer. Unfortunately, these alternative sources of data are creating problems similar to those people faced before the FCRA and forcing the question: What data is a company using to evaluate my credit risk, and is it legal?

The history of the credit bureaus and their processes of acquiring data is rooted in controversy, lawsuits, and privacy violations. As we step forward into a future where your employers are using credit reports as a hiring tool, we need to be vigilant in our efforts to protect ourselves.

Although the future of the credit industry is murky, there seems to be a lot of activity happening on the side of ensuring consumer privacy rights. An easy example would be the Comprehensive Consumer Credit Reporting Reform Act introduced by Rep. Maxine Waters. These types of changes push for shorter statute of limitations on collections, expanding access to credit reports and credit scores, and increasing federal oversight on credit scoring models.

Fortunately, for now, we have yet to see a company like Facebook or Twitter make a splash in the credit reporting industry. But it does leave some burning questions on the future of industry...

Will your credit score reflect the data gathered from your Facebook page in the future?

Will the data from your Twitter account impact your credit worthiness down the road?

What is your opinion? How could this change the industry? Is there a positive spin to these potential changes?

Alex Grimnes