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‘The black swan event that none of us anticipated’ — US consumer reports in the age of Covid-19

Our US Legal Counsel, Tom Oscherwitz, was recently invited to share his views with consumer credit blog, FinTalk. Here are our highlights.

1. What’s one long-term effect you foresee on consumer finance as a result of the current crisis?

Though we’re still in the early stages, Covid-19 has already imposed a fog of uncertainty regarding the predictiveness of traditional credit models. It’s a classic black swan event that none of us anticipated.

The crisis is likely to accelerate this trend to rethink traditional credit modeling. Having even slightly outdated information raises a risk that financial institutions need to mitigate. So if there was ever a time lenders could use these new tools and approaches, it’s now.

I hope we’ll look back at this time as an era of industry innovation and transformation.

2. Not all readers may be familiar with the fintech you recently joined, Aire. What excites you most about Aire and joining the team?

At the CFPB, I spent a number of years overseeing the US consumer reporting industry. Our credit reporting system supports millions of credit decisions annually, but it still has huge gaps. So from my vantage point, I can tell you that Aire brings several absolutely critical pieces to the table.

Aire can help lenders evaluate the creditworthiness of any consumer and can do it in near real-time. Aire is laser-focused on collecting, validating, and analyzing data directly supplied by consumers themselves (otherwise known as first-party data) to provide lenders with a real-time, holistic picture of their circumstances.

Aire was founded in the UK and thought very deliberately about how to enter the US market. It’s committed to doing the necessary, hard work to build out its compliance systems in the US in order to deliver lasting value for lenders. Aire recognized early on that to succeed here it had to win the trust and confidence of regulators and consumers.

Tom Oscherwitz, Aire’s US Legal Counsel, at his home in Washington DC.

3. The CFPB recently issued a blogpost addressing perceived regulatory uncertainty on the subject of AI/ML in credit underwriting, highlighting specifically that the existing regulatory framework accommodates recent changes. What’s one recommendation you would make to a Chief Risk Officer (CRO) at a bank or lender in light of the CFPB’s recent comments?

Several years ago, when talking to folks in the industry, I might have argued that the lack of explainability of ‘black box’ AI models inhibited their deployment in consumer lending. No longer. Techniques like SHAP (SHapley Additive exPlanations) now give lenders a clear pathway to explain model output. The CFPB blog tacitly acknowledges these advances when it notes, the ‘industry continues to develop tools to accurately explain complex AI decisions, and we expect more methods will emerge.’

4. When we look back 5 years from now, what’s one legacy you believe the CARES Act and associated federal relief programs will leave behind on the credit reporting market?

Context: The CARES Act calls for delinquencies associated with the pandemic to be furnished to CRAs differently than delinquencies in the past. There’s debate as to whether this change adversely affects the ability of lenders to accurately assess consumer risk.

I appreciate the sentiment behind the CARES Act provision in imposing constraints on lender reporting of forbearances to consumer reporting agencies to help consumers weather the crisis. COVID-19 has slashed the pocketbooks of millions of households as you’ve recently reported in your newsletters. But though well intended, I fear these provisions may make it harder for consumers to get credit at desirable terms.

When faced with uncertainties, it is only logical for a lender to cut back on lending or only issue loans with a greater margin of safety. What really matters now, is what they do next…

5. What gives you optimism amidst the current environment?

I’m optimistic because of the increasing number of new entrants in the market with a strong mission to create positive change for consumers. The focus has rightly shifted to the consumer and the building of more ethical, sustainable business models, not just trying to optimize the amount of revenue that they generate.

A great example of that is Aire: our motto is that ‘we exist to make credit equitable for everyone’ — now more than ever, that vision statement feels vital to the credit ecosystem.

The full interview was originally published by FinTalk News and is available here.

Powered by first-party data, Aire provides actionable credit insight to lenders today, better enabling consumers to build their tomorrow. Headquartered in London, Aire is now operational out of Washington DC.

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We do hard things so people don’t have hard times. And we’re starting by fixing the income ecosystem — for everyone.