Fireside Chat with CFPB Director Richard Cordray at Money 2020
Last night I had a fireside chat with CFPB Director Richard Cordray on the main stage at Money 2020. It was the first time a federal agency head has addressed the world’s largest financial conference (11,000 people this year), and he did not disappoint.
Director Cordray explained how the CFPB will play its leading role in regulating financial innovation. Not surprisingly, he called on the thousands of innovators in the audience to design products that help, not harm, consumers. He said startups should have compliance in their DNA, from birth. He promised to make enforcement tough but fair. He announced the first-ever report on the Bureau’s Project Catalyst, its regulatory “sandbox”-type program that tests innovative concepts that raise regulatory questions.
And then he said two things that are making news today.
First, he said the CFPB is going to assure that consumers can control their own financial data, including to let third parties help them manage their finances. Today’s personal financial management (PFM) tools increasingly work by having the customer allow access to bank account information for analysis of income and spending flows. Examples are Mint and Digit (see my podcast with Digit CEO Ethan Bloch about making saving easy, automatic, and even fun). In recent months, banks have voiced concern that such solutions may not be reliably safe, and some institutions have cut off access or made these new tools much harder to get. While consumer safeguards may be needed, the core principle of customers’ right to their data is fundamental to achieving the promise of fintech. It’s also enshrined in the law, in Section 1033 of the Dodd-Frank Act which empowers the CFPB to write rules on the issue. Director Cordray last night announced a priority to move forward in securing these rights.
Second, the Director also said the Bureau will take on the thorny issue of how lenders can use nontraditional data in evaluating credit risk. Many people (including me) believe that new kinds of data are a key to widening financial inclusion (especially when paired with low-cost mobile services). Tens of millions of Americans have thin or no credit files, or complex situations that prevent accurate underwriting under traditional scoring. Today’s big data and machine learning make it possible to fine-tune risk assessment of these people and find the many who are actually creditworthy. That effort collides, however, with the equally powerful policy goal of fair lending. Use of alternative data is so novel that lenders can’t tell what factors can be considered without potentially violating the laws against discrimination through “disparate impact.” Some data types will undoubtedly have disproportionate adverse effects on one group versus enough in terms of race, gender, ethnicity, and other borrower characteristics. When such effects occur, the burden shifts to the lender to demonstrate not only that the data accurately predicts credit performance, but also that there are no alternatives with less discriminatory results. Precisely how to do so is unclear.
This uncertainty inadvertently undermines the policy goal of encouraging lending to creditworthy consumers who have moderate incomes. Most such loans are not highly profitable anyway, when done responsibly. When they also carry extremely high regulatory risk, many lenders simply avoid the market. In other words, the goals of consumer protection and inclusion can work against each other.
Today, new technology makes it possible to have both — if regulators provide ground rules on using non-traditional data that are clear enough to follow without enforcement fear. The CFPB has embarked on a path to provide it.
In our fireside chat last night, I said data is the circulatory system for innovative finance, the life’s blood. If it can’t readily flow and be used — within appropriate safeguards — finance will develop heart disease. The system will be weakened by blocked arteries and loss of oxygen, and some parts — with high potential to help consumers — will die. Last night, the CFPB took on not one, but two, of the policy challenges most crucial to building a healthier financial system for everyone. Good for them.