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The CFPB recently issued what it calls their new ‘no-action letter’ to Upstart Network, a San Carlos, CA company that makes personal loans to consumers. The reason; Upstart will use and evaluate certain alternative credit and other consumer data when making credit decisions on their applicants.
The CFPB’s apparent intent, through these no-action letters, is to encourage lenders to develop and offer alternative products and ideas to assist consumers.
The letters let the creditor know that the CFPB has no intention of initiating regulatory enforcement action with respect to the new program or product, as long as the company does not violate the law, or abuse the intention.
Although Upstart Network does not now offer mortgage financing, this is good news for the mortgage industry.
Recently, Congress introduced legislation that would allow Fannie and Freddie to consider alternative credit, like rent, utility or mobile phone payments, as part of a consumer’s credit profile.
By doing so, it is believed that many more consumers may qualify for loans as these items may help create a better credit profile which would be above the standard credit score.
In Upstart’s case, aside from the traditional credit profile and score, they also utilize educational background and employment history when evaluating a credit application. They attempt to get a much more complete picture of their applicant. That sounds to me like retro lending.
This is not a one-off program. Under the CFPB’s Project Catalyst, an initiative designed to encourage consumer-friendly developments in the financial marketplace will facilitate a no-action letter to support the new marketplace innovation.
According to current CFPB Director, Richard Cordray, the CFPB wants to learn more about alternatives that may open up greater access to credit for many Americans who are currently stranded outside the mainstream credit system. They also want to better understand how creditors could mitigate risks to consumers that may arise from these innovations.
This is good news for lenders but it also presents some real challenges. For years now, lenders have relied on the standard FICO score, along with agency guidelines for allowable down payment, debt ratios, length of employment, and reserves, when qualifying applicants for a mortgage.
The agency’s black boxes do most of the underwriting. Lenders gather and verify the data, plug it into the AUS, and viola a decision is made for them. Not much use for the good old compensating factors.
CFPB’s Project Catalyst may help to change all that but it will also put lenders at more risk. Underwriters will once again be charged with the responsibility to carefully review all facets of an applicant’s profile, not just the FICO score and ratios. Everything will be on the table.
Guess these might be the new non-QM products. Will lender’s take the risks? Be careful what you wish for!
Lenders that may be exploring products that utilize alternate information, or processes, for consumer qualifications and loan pricing, may want to contact the CFPB for more information about the no-action letter. You can start at Project Catalyst.
Opportunity may be knocking but are you ready and willing to open the door?
