Last October, the Consumer Financial Protection Bureau (CFPB) issued a proposed rule on Personal Financial Data Rights under Section 1033 of Dodd Frank. The rule promises, among other things, to improve the ability of consumers to access and share their own financial data, including their history of managing bank and credit card accounts. This data can be used in a variety of ways, from facilitating ACH payments to powering personal financial management applications.
One such use-case, mentioned numerous times throughout the CFPB’s proposal, is “cash flow underwriting” or “transaction-based underwriting” or where a lender looks to a consumer’s banking history (in addition to, or in lieu of credit history) to make a credit approval decision. While this form of underwriting has been employed manually by lenders throughout history, its emergence as an automated approach that can be used at scale is new and promises to “improve pricing and access,” allowing lenders to more accurately assess risk and thereby approve more consumers for credit at more attractive rates.
Traditional credit scores (and credit history) drive the vast majority of credit approval decisions today. They are based on a consumer’s history of borrowing money and repaying the money they’ve borrowed. But credit scores do not typically include information about a consumer’s income or savings, which is highly relevant to debt repayment. They also don’t usually include information about major financial obligations like rent and utility payments; even some loan types, like Buy-Now-Pay-Later (BNPL) loans, are typically missing. Traditional credit reports provide a partial—but incomplete—picture of a consumer’s financial circumstances. Worse, tens of millions of consumers lack credit scores entirely, and these folks are disproportionately younger, lower income, and black and Hispanic.
When banking history is incorporated into the credit approval process, lenders receive a much fuller financial picture. Data describing a consumer’s cash flow, income, savings and spending history, among other things, can help lenders identify more good borrowers, even among consumers that don’t yet have a credit score.
The CFPB’s proposal takes a groundbreaking step towards enabling this new form of underwriting, specifically providing that companies that facilitate consumer-permissioned financial data sharing, like Plaid and Finicity, will be treated as consumer reporting agencies under the Fair Credit Reporting Act when the data they transmit bears on a consumer’s creditworthiness and is expected to be used for credit underwriting.
This position has far-reaching implications for how we think about credit scores in this country. What we consider to be credit history is set to expand - significantly - beyond the four corners of legacy credit reports. Soon, the way a consumer manages their money - and what they make, save, and spend over time - will make up an essential part of regulated credit information.
This is good news for lenders and for consumers. With rich new data available for credit underwriting, lenders can be more confident in the credit approval and pricing decisions they make. They can also accept more borrowers than they could previously, expanding their customer bases profitably and furthering financial inclusion. Consumers win as well - with more credit options available and a greater ability to demonstrate their creditworthiness beyond just the traditional credit score.
At Prism Data, we’re working with lenders across many different categories - from credit cards, to auto loans, to BNPL and mortgages - to prepare for and benefit from this major shift. Prism’s platform makes it easy for lenders to analyze banking history and incorporate cash flow underwriting into their decision-making, with data categorization, ready-made features, and analytical scores like our CashScore®. If you’re interested in the value that cash flow underwriting can bring to your organization, we’d love to hear from you.
