Access to fair and responsible credit is essential to the well-being of all consumers. Fixed-rate mortgages help families build wealth and can help prevent their housing payments from going up quickly during inflationary periods. Small-business loans can likewise help entrepreneurs build wealth. Student loans can also help people gain knowledge and skills necessary to obtain high-quality jobs with good wages and benefits. Loans with consumer protections embedded can also help people finance cars and other needed goods and services. Access to fair and reasonable credit can also help consumers weather economic shocks.
However, loans that lack strong consumer protections can harm individuals and families. In the most extreme example, some alternative financial services providers, such as payday and car-title lenders, create a cycle of triple-digit annual percentage rate (APR) debt. Often, individuals technically pay off the debt but soon run out of money and must take out another loan. Ultimately, many pay more in fees and interest than they do in the original loan amount.
Thus, ensuring consumer protections in credit products and services is essential. Evaluating a consumer’s ability to repay a loan before extending credit is especially important, as is ensuing reasonable interest rates and fees.
The Consumer Financial Protection Bureau (CFPB) enforces most federal laws that protect consumers when they apply for and obtain credit. These include:
- the Equal Credit Opportunity Act, which protects consumers from discriminatory credit practices, including age discrimination;
- the Fair Credit Billing Act, which protects consumers in billing disputes;
- the Fair Credit Reporting Act, which grants consumers access to, and input into, their credit files;
- the Truth in Lending Act, which requires accurate disclosure of a loan’s APR and the total dollar amount of the finance charge; and
- the Fair Debt Collection Practices Act (FDCPA), which protects consumers from unscrupulous and unreasonable tactics of debt collection agencies, including law firms and lawyers that regularly engage in the collection of debts. FDCPA does not, however, safeguard against the in-house collection activities of the original creditor.
All states and the District of Columbia have a consumer protection law prohibiting unfair or deceptive business practices (UDAP). These laws play an important role in protecting consumers from unscrupulous businesses. The scope of UDAP laws varies widely. Some states expand upon federal protections, while others limit protections. For example, some states broadly cover a wide range of business activities while others exempt many business entities, products, and services, such as real estate, mortgage, and credit transactions. Every state authorizes at least one state agency to enforce the law, usually the attorney general. Most state UDAP laws allow consumers to enforce the law as private citizens and seek money damages as redress for any harm they may have suffered.
Alternative underwriting: Most lenders use a consumer’s credit score to determine eligibility for and the interest rate of a loan. Consumers with higher scores are more likely to qualify for a loan and receive a relatively low interest rate. Approximately 45 million Americans, however, lack credit scores because they have limited or no credit history with the three major national credit reporting agencies. Their ability to get a loan to buy a house or car can be severely limited as a result of not having a credit history. The inability to obtain credit at reasonable rates harms many people of color and people with low incomes. These populations are less likely to have a credit score. Those who do have one are more likely to have a low credit score.
Some lenders are using alternative underwriting methods to determine a consumer’s ability to repay a loan. Rather than using a credit report or score, these lenders examine information not contained in a traditional credit report. For example, consumers may authorize lenders to examine their bank-account transactional records to demonstrate that they have adequate net income to repay a loan. Some consumers could help get access to credit this way. Nevertheless, consumer protections remain essential. For example, bank account transactional data could be very valuable if sold to a third party. That is why consumer advocates underscore the importance of using the data only to underwrite the loan and prohibit the lender from allowing the data to be shared with or sold to an affiliate or another company.
CREDIT PRODUCTS AND SERVICES: Policy
CREDIT PRODUCTS AND SERVICES: Policy
Fair credit terms
Consumers should have access to credit on fair and reasonable terms.
Reasonable interest rates
Policymakers should establish reasonable interest rate ceilings for all lenders. These rates should correspond to prevailing Treasury Bill rates. Alternatively, they should be based on the amount of funds borrowed and the need to maintain the availability of credit for disadvantaged customers. These rates should not exempt certain industries, such as payday lenders, car-title lenders, installment lenders, or refund anticipation loan providers.
Product information and legal and disclosure documents should be clear and accurate.
Policymakers should require consumer protections for consumer and small-business loans that are underwritten using financial account data, including the following:
- Lenders should obtain meaningful consent from consumers for using their financial transaction data to underwrite their consumer or small-business loan. Consumers should be able to rescind their consent at any time.
- Data should only be used for the purpose of determining individual credit risk. Financial account data should not be used, shared, or sold for any other purpose. The lender should securely dispose of the data when no longer necessary (see also Data Privacy and Data Security).
- Any algorithms that analyze alternative data to determine eligibility for and cost of loans should be fair, transparent, and accountable (see also Algorithmic Accountability).
Existing laws that apply to traditionally underwritten loans should apply to alternatively underwritten loans. This includes the Truth in Lending Act.
Financial institutions should be required to provide loan-level data while protecting consumer privacy and security to better understand lending disparities. This includes data on age, race, and ethnicity.