As founder, president, and CEO of the Policy and Economic Research Council (PERC), Michael Turner, Ph.D., is an international expert on credit access, credit reporting and scoring, information policy, and economic development. He has worked on projects in over 25 countries on six continents and has consulted with the U.S. Congress, numerous state legislatures, and government agencies, including the FTC, the FCC, the FDIC, the Federal Reserve Board of Governors, the Council of Economic Advisers, and the White House.
The Score is grateful to Turner for making time to address our questions as he is beginning what promises to be a very busy year in 2017.
PERC’s mission includes addressing the problem of global credit invisibility. How do you define that term, and how extensive is the problem in the U.S. and in the rest of the world?
Credit Invisibles are those who either do not have a credit file at a nationwide consumer reporting agency—
TransUnion, Experian, or Equifax—or who don’t have enough data in their credit reports to generate a credit score. For most Credit Invisibles, it is virtually impossible to access the affordable mainstream credit needed to build assets through homeownership and/or owning a small business. An estimated 54 million Americans are credit invisible and must have their real credit needs met by high-cost lenders, such as pawnshops, check cashing services, and payday lenders. Globally, we estimate there to be approximately 4.1 billion Credit Invisibles.
Credit education is a key component of your approach to improving credit access. What are some of the misunderstandings or gaps in knowledge that you consider most important to remedy?
Nearly half of our credit-eligible population thinks that credit reports and credit scores are different names for the same thing. That is scary! We can all work hard to improve credit reporting and credit scoring, but unless your average borrower understands how their behavior affects each, then they won’t fully benefit. There is clearly a huge need for personalized credit report and credit score education, and the most logical organizations to help educate people are the nationwide consumer reporting agencies.
Your recent article, “The Truth about Credit Scores,” takes the Consumer Financial Protection Bureau (CFPB) to task for unintentionally misleading U.S. consumers “into thinking that there is just one [credit] score used by lenders.” Can you elaborate on the pitfalls of giving consumers that impression?
This is one of the most enduring, and possibly most damaging myths in the consumer credit market. Most people believe there is just one credit score—a generic credit score. Having any federal government entity perpetuate this myth could distort the credit scoring market. Lenders and investors could erroneously believe that a single score is preferred by the federal government, and they will naturally be inclined to use and/or invest exclusively in that score. This could even become a standard—as is seemingly the case with the GSEs [government sponsored entities, i.e., Fannie Mae and Freddie Mac] concerning residential mortgage underwriting. Ensuring vibrant, robust competition is simply the right policy in credit scoring or in any other market. It fosters innovation, allocates investment dollars optimally, and promotes competitive pricing. All parties win whenever there is choice and competition.
PERC’s study on the Credit Repair Organizations Act (CROA), Is CROA Choking Credit Report Literacy? advocates lifting the act’s provision banning the three major credit reporting companies (Equifax, Experian and TransUnion, referred to in the study as credit reporting agencies, or CRAs) from offering consumers credit education in connection with their credit reports. Can you elaborate on why you’d like to see that change?
The “why” is simple: we’ve empirically established that people materially benefit from personalized credit education with a national credit bureau—because they are roughly 2.5 times more likely to move into a better risk tier than those who have just had generic credit education. We’ve also established that applying CROA to national CRAs affords no consumer protections. In short, there are real costs to borrowers—especially lower-income borrowers—and no benefits. The solution is easy too. Congress has already created a national architecture for people to directly dialogue with nationwide CRAs about the contents of their credit reports. Presently, owing to an expansive interpretation of CROA (which was never intended to apply to nationwide CRAs), whenever consumers contact a credit bureau and ask how they can improve their scores, they are read an intimidating legal disclaimer, and are forced to wait at least 72 business hours before they can speak to a credit educator at the credit bureau. This makes no sense, and needs to be changed. Let people talk to credit bureaus about how to improve their credit scores without all the barriers. And let other good actors—like Credit Karma and Mint.com—do the same. This would benefit the industry through competition and consumers by making it easy to get expert advice.
PERC is big believer in use of “alternative data” as a means of expanding credit access. How do you define that term, and do you foresee a need for regulations to ensure new forms of data are monitored for quality and consistency, stored securely and applied fairly?
With the advent of “Big Data” and “Smart/Intelligent Data,” the concept of “alternative data” has become diluted. Whenever PERC reports on “alternative data,” we mean nonfinancial payment data, such as energy utility, telecoms, media, rent, and other credit-like regular payments. PERC has conducted cutting-edge empirical research on this topic for more than a decade, in the U.S. and globally. We are currently partnering with the U.S. Department of Housing and Urban Development to study the impact of including public-housing and other rental data in credit reports. These categories of data we now call “traditional alternative data,” as it is structured data. The “fringe alternative data” consists of unstructured data, or so-called Big Data, which includes the meta-variables, tool kits, social media data, etc., that has captivated audiences around the world. The benefits of including traditional alternative data in consumer and commercial credit files are well established, and these assets should be vigorously pursued. It remains to be proven whether unstructured data could be used to protect consumer rights. Regulators should proceed with caution but should also create a space (sandbox) to enable experimentation.