Continuing his campaign on equality at every level, President Joe Biden’s administration has proposed creating a new credit bureau under the Consumer Financial Protection Bureau. This resulted in many speculative headlines that the government may be replacing existing credit bureaus, making a lot of people confused with the future of loans if such a decision is to be made. Merrill Chandler drills down into these pretty misleading articles, taking a look back on the players involved in the credit system to see what this proposal truly has in store for everyone. He also breaks down his hopes for this new credit bureau, which is highly possible to give low-income earners a chance to build up their credit score without that much difficulty. 

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The Reality Behind The Big Headlines

The Truth You Trust On The Reporting Of Biden’s National Credit Bureau Proposal

In this episode, we are going to crush it. At this moment, there’s a big brouhaha about the administration‘s desire to have a new credit bureau. What does this mean? People are freaking out because some news outlets say that at some point, they want to get rid of the credit bureaus. What is going on? What’s happening? In this episode, we’re going to make sense of what is at stake and what may be happening in truth. We’re going to read between the lines of these news articles and come to discern what is happening and what’s even possible. 

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I’ve got to tell you, there have been some exciting things happening. The administration and again, just to be saying those words, I want to make sure everybody knows that I am apolitical. We’re going to be talking about finances. The administration has proposed the creation of a new credit bureau that would be governed by the CFPB, the Consumer Financial Protection Bureau. As some articles have, whether responsibly or irresponsibly, said in their attention-grabbing headlines, they’ve said that this new bureau may replace the current bureaus. That has thrown a whole lot of people on the spectrum into a tizzy or huge question marks over their heads saying, “What the hell is happening?” This episode is about drilling down and taking a look at what the articles are saying, what’s being proposed and what the possible intentions are. 

The biggest theme of the FICO world is inclusivity. Click To Tweet

If you’ve read any of these articles, there are not a whole lot of quotes from the administration or even people from the CFPB, the Consumer Financial Protection Bureau. There are few quotes coming from the powers that be and yet these articles are stirring things up. Let’s take a look at this. I speak specifically of Yahoo! News and Forbes and their review of this proposal. I don’t even know if it’s a proposal yet for the administration. It’s an exploratory committee. What’s at stake here is a centralized government-authorized credit bureau that is managed and regulated by the Consumer Financial Protection Bureau. These articles talk about it competing with Experian, TransUnion, and Equifax, the three big bureaus. I’m going to be throwing a lot of things in here. 

Credit System Players

First of all, there are not just three credit bureaus. There are Infineon and Innovis. There are other credit bureaus that serve other markets. There’s even LexisNexis, which serves other markets. There’s a whole bunch of credit bureaus that are called Consumer Reporting Agencies, meaning they report on consumer topics and behaviors. When these articles pit this new government-sponsored bureau against Experian, TransUnion, and Equifax, there’s even more that we have to account for. If you’re doing a government security check, they don’t pull your purely financial bureau like Chase would or a lender would. They pull specific bureaus to check different things about your history. Every credit bureau, in its essence, is collecting certain data. If you’ve been to my bootcamp, you will remember this. If you haven’t, then we’re going to do a little quick review of the players in the credit system. 

First of all, there’s you, the borrower. We’re going to be talking about borrowers and the different types of borrowers. Borrowers file an application with a lender to borrow money. Most of us probably heard of any inquiry. That lender sends an inquiry to the credit bureaus but the credit bureaus have FICO software on their mainframes. This inquiry is filtered through the FICO software. This is so important for the rest of our conversation. Bureaus collect data, FICO scores data. When these articles refer to credit bureaus and their ratings, credit bureaus don’t rate their own data, in a couple of exceptions where they have a separate company.

 

 

If you go to TransUnion and you want to buy a TransUnion credit score, first of all, understand that that credit score is not used generally by lenders. FICO credit scores are used by lenders but if you decide to buy one, as irrelevant as it may be, you’re buying it from a separate company than the actual TransUnion credit bureau. It may be a wholly-owned subsidiary but the Fair Credit Reporting Act does not allow a bureau to rate its own data. It doesn’t have ratings. When you read in these articles, the credit bureau ratings, let’s keep all of the parties where they belong. Let’s keep our heads on straight so that we can understand what’s going on. The lender sends an inquiry to the credit bureau. They grab the data at the credit bureau level and it filters through FICO scoring software. 

The credit ratings come from FICO for more than 90% of all lending decisions. More than 90% of inquiries all use FICO for this purpose. That’s downloaded to the lender. The lender reviews the data and filters the data even further through its own underwriting software and adds the credit score from FICO as part of that evaluation. The lender approves or denies the application, not the credit bureaus and not FICO. Do we understand this? This is the first place we’ve got to be clear or nothing else we talk about is going to make sense. Lenders approve or deny the application based on the data that is downloaded from the bureaus and filtered through FICO’s scoring service. We’ve got to understand how this works before we move forward. 

New Credit Bureau

Why does the administration feel that there’s a need to have a new credit bureau? The first proposal in the record comes from an independent organization that proposed it to Biden. Biden picked it up as one of the ideas that he felt would be important to his administration and spoke about it in this last election run-up. Why it’s resurfacing is because he’s sitting there, he’s in his first 100 days of office, and he is looking for how to create the most amount of equality the fastest. It’s not just financial equality. It’s equality at all levels. That’s one of his big things. I’m not for or against. I’m saying that his objectives are to create financial equality. The current media is making it sound like the administration is out for blood and wants to destroy the current system.  

In the Forbes article, there are some excellent points there. There’s not enough of a drill-down. That’s why I got a way in. That’s why it’s the truth you trust. It’s what we’re looking for you to be able to understand what’s happening and how to do the math so that we can understand how this proposal may serve some of our fellow citizens without creating any damage anywhere else. Since the data from the credit bureaus are not rated at the bureaus, they’re rated by FICO. Since lenders are in charge of lending, we have to talk about what are the problems that the articles are implying but don’t exist. 

Let’s look at this. I call it a triangle because you’ve got the borrower, your lender, the bureaus, and FICO in the middle filtering the data. Lenders lend their own money to borrowers. They’re going to defend to court being forced to use an unproven rating system if this new bureau replaces all the other bureaus. Let’s go with what the articles are saying. I’m not saying that this is true and I’m not saying the administration is saying this is true. I’m going off of what the articles are implying or sometimes even boldly say. This new bureau is not a proven entity. Imagine FICO has been scoring data for many years. It’s got four versions of software that it has proven over and over again so much so that 90% of every lending decision in this country uses FICO data in its approval process.

 

It’s proven. Lenders trust it. If lenders are trusting it, unlikely, they’re not going to grab some new bureau and say, “Let’s take this new bureau’s data.” Let’s say that the government proposes to use a new algorithm. This is what is inferred is that the new bureau will rate things differently. Experian and TransUnion tried this once. The three credit bureaus got together, formed a consortium, formed a company of which always they partially own. It’s called Vantage. They created a score called VantageScore. If you‘ve been in any of my bootcamps, any of my shows, or anything else, I call it a FAKO score because if it’s not FICO and lenders aren’t using it, it’s relatively worthless. 

Based on studies, it’s typically and significantly higher as a score than many FICO scores. It’s misleading. The three bureaus got together and tried to create a score separate from FICO and it hasn’t got any traction. It has very little traction and FICO continues that to be the trusted source of lending decisions in this country. Having said that, it was many years ago that VantageScore was proposed as a replacement. The administration writing an executive order or anything else, I don’t believe that all of a sudden there’s going to be a new scoring model that’s going to be used that lenders will trust. The lenders‘ money is at stake. If they don’t trust it, they’re not going to use it. 

Let’s pretend there’s a pitch battle. The government, the Feds can try to nationalize FICO. Do you think that’s going to happen? Do you think that they’re going to nationalize FICO? It’s not going to happen. FICO has to submit an injunction order and that’s going to quickly hit the Supreme Court. Based on the temperament and the interpretive capacity of the Supreme Court, they’re not going to nationalize anything. FICO, its algorithms, its IP, its Intellectual Property is going to remain safe. 

As a corollary to that, the government is not going to nationalize the three credit bureaus, especially since there are not three, there are at least eight used for different purposes. There’s more than that but for big purposes. They’re not going to nationalize that. That’s why they want to start their own and we’ll get into how this fits in our current model. If they’re not going to nationalize FICO and lenders aren’t going to use some upstart algorithm to measure the quality of lending for lender dollars, we’re at an impasse. I don’t even know if it would be a long-drawn-out battle because the Supreme Court would get involved quickly.

The last bastion in manual underwriting is mortgages. Click To Tweet

Equal Opportunity Act/Lending 

Let’s take a look at what Biden is looking to address. There’s a lot. It’s called the Equal Opportunity Act and there’s Equal Opportunity Lending. What that means is that anybody of any race, creed, gender, sexual orientation or otherwise, can fill out an application and it can be considered fairly by the lender. We’re going to talk about manual underwriting and automatic underwriting. Everybody in this country cannot qualify for current lender financing like a top-tier bank, low-interest financing because FICO measures people who already have been approved and already have trade lines, credit cards, credit lines, retail cards. We’re not even talking about the high–value versus low–value. We’re talking about FICO measures people have already been approved for credit. Over the last few years, FICO has been expanding into non-traditional trade lines. How do they capture rents? How do they capture payment on utilities, payment on rents, payment on childcare, utilities, gas, electric, telephone and cell phone bills?  

Many of my tribe already had asked about the Experian Boost program. These are ways in which they’re expanding the ability to collect data. I’ve told you clearly that Chase is not going to give you a $50,000 business line of credit based on you paying your rent on time. I don’t care if it’s for 40 years. They’re not going to count your cell phone payments, on time as they may be, towards your creditworthiness or your fundability™. It’s not going to happen. What happens is there are people who are not already in the credit system. 

I’ve been to three FICO Worlds with various members of my team. In each case, the biggest theme of FICO World is inclusivity. How do we get, collect, trust, and have FICO be able to score how many more variations of trade lines, cell phone bills, rents, childcare and utility payments? They’re already ahead of the game. They’re already years out in their planning. For all I know, they read the paper that Biden did and are like, “We need to account for this.“ The software that lenders are using already requires you to have what we call trade lines, credit with reporting banks, other financial institutions and retail outlets. 

Automatic Underwriting Vs. Manual Underwriting

Let’s get to the automatic underwriting versus manual underwriting. For many years, manual underwriting was how loans got approved. The only thing they trusted were the actual documents, paychecks and W-2s. They want your tax returns. They want your financial statements. I don’t know if you remember back in the day, but when you filled out a credit application, they said, “What are your assets? Furniture, jewelry, furs.“ I remember the days where they would list every possible version of assets so that they could check you out and see if you were fundable. Here’s the thing. The last few years have been skyrocketing in the adoption of lenders to use automatic underwriting. Automatic underwriting as we all know, FICO measures, plus or minus, depending on the bureau, 40 borrower behaviors but they don’t measure the characteristic of the borrowers themselves.  

This is so important. The reason why there is 0.0001 that why automatic underwriting removes discrimination from applications is because we’re not sitting in front of another human being who might have beliefs. As outdated as these beliefs may be, they have beliefs about other human beings about their gender, sexuality, race, and orientation. Automatic underwriting removes to the nth degree any kind of preferential treatment for or against any of those writings. They measure what you do with your money and your relationships with lenders, merchants and retailers, not who you are.

That’s why automatic underwriting is so genius. That’s why it gives many more people so much more opportunity. The hitch is to get a FICO score, you’ve got to have at least one trade line for at least six months reporting to the bureaus. You only get scored on that bureau and report to that bureau. We’re already back to that place we spoke a few moments ago saying that if you don’t have these trade lines, if you don’t have these accounts, you’re out of the game completely. No shot in hell at being approved because you’ve got to build a fundable profile. 

Here’s what’s crazy. Both articles mentioned the uneven or discriminatory facets of mortgages. What I’ve told my tribe, what I’m telling you and everybody who’s reading, here’s the thing, the last bastion, the last holdup in manual underwriting, our mortgages. Some forward-thinking outfits are using automatic underwriting more and more. We’re getting more reports for our clients when we send them to these outfits. If your profile is banging and awesome, then they’re not asking for the traditional documents because the behaviors reveal your priorities and those behaviors are trustable. That makes them fund-able behaviors. 

Not A Crackpot Idea

For all of the lenders, everybody out there who’s originating mortgages where a human being has to sit from another human being, we’re back into human beings not being good to each other. I can’t account for that but there are a couple of things that may be in the works with this idea by the administration to at least begin to get some traction in a moment. Let’s take a look at how this may not be a crackpot idea. I’m not putting words in anybody’s mouth. I haven’t been in the meetings with the administration while they kick this around. Given what I know about the lending environment and what I know about the inaccessibility of credit opportunities to persons who aren’t already in the credit system, this might be an idea of how this is going to work. 

There is a historical precedent for government lending. SBA supports small businesses. SBA is the Small Business Administration. How many of us have received either P loans or EIDL loans out there in the world because the government is infusing money into the hands of small businesses so that we can get traction? We can keep people employed. We can keep individuals who are employed spending money on mortgages, rents, food and keeping the economy moving. We’ve done it with student loans.

 

We’re not going to get into yay student loans or nay student loans. I’m saying there is precedent for the government to offer directly to individuals an opportunity to improve their education and move forward through higher education. There is a marketplace of individuals, fixed–income, low–income that is completely underserved and is not being served well. What I mean by that is that low-income, fixed-income folks who are less financially literate are predated upon. It’s a fancy word for predatory lending or for subprime lenders where the interest is regressive and it puts the borrower in a hole because it’s 12%, 18%, 36% interest. 

Small businesses, as a comparison, if you get any EIDL loan, it’s 1% interest. Below the current lending economy where people have trade lines, they’re being reported. That’s the market that we address specifically is how to optimize your personal profile, how to optimize your business profile so you can stay up here in this lending marketplace and get tier one, tier two loans. Stay away from those predatory lenders. Stay away from subprime lenders over there in tier four. 

What about the millions of persons who aren’t even close to having a trade line on a profile? How many don’t have profiles? I didn’t hear back from my FICO liaison fast enough but in one of these FICO Worlds that we attended, there’s a number of millions of persons estimated that do not have a credit score. If you don’t have a credit score, that means you don’t have trade lines active and reporting. I did not get back with that number in time. What I believe this credit bureau and the brouhaha around this credit bureau sponsored by the federal government. Since there is a marketplace for fixed and low-income that’s underserved and being abused by high interest and high fee lenders, the administration may want to address that marketplace just like it did students and small businesses. If it does, there may be a place for a credit bureau that is based on other lending criteria such as rents, cell phone bill payments and childcare payments, consistent payments. 

The interesting thing is that the three credit bureaus and the lenders are not prepared to address that market. They’ve proven FICO out over and over for years that it’s a trustworthy model to lend on. As we’ve described, that’s above the folks who are in the non-lendable or non-fundable space. What if this bureau is the tip of the iceberg that is talking about how to address and lend to using different criteria and lend to this marketplace? It does not interfere with the FICO, lenders and the credit bureau marketplace. No harm, no foul, business as usual. This new bureau may allow the collection of alternative data and here’s what’s interesting. FICO did not tell me this. I’m being very clear. I know that for the years I’ve been attending these FICO events, they are focusing on the ability to score this non-traditional data and be more inclusive. 

I don’t know but I’m willing to bet that if I were this administration and this is the market that I wanted to infuse capital into in order to get A) the economy churning even further and B) to create more opportunity to get people to improve their borrower behaviors, I would go to FICO and say, “What have you got for me? What can we measure? What data can we collect that you’ve proven a new extended inclusive model of FICO?” I’ve never seen that software. I know that this is a big deal to them. If it’s a big deal to them, they are so forward-looking. They’re the ones who got us into automatic underwriting years ago. It had to be years ago that they were casting forward when automatic underwriting started becoming a big deal. Each one of these things is extremely important for us to create a sense of continuity.

We’re addressing all the marketplaces, all of our citizens but we’re addressing them to the level that they’re capable of borrowing. I don’t know what these trade lines would include. I don’t know if there’s government financing of auto loans. I don’t know if there’s a different version of government financing of mortgages. What I know is for an entrepreneur, there are tens of millions of people who are not able to qualify under the traditional lending model, but who very well may be and most likely to some high degree are faithfully paying the bills every month for maybe even a 24-month look-back period. In the current credit system, they’re not getting credit for it. 

The idea of collecting different data or extending what data is collected to include these other types of payments that are being made by these underserved borrowers, I know that if they’re not already prepared to deliver a fundability™ score on them, they would love to get hold of that data in order to optimize. They would love to be able to create a score that would allow the Consumer Financial Protection Bureau to create a greater opportunity for more people to get loans. It would be like taking Experian Boost to a whole new level. 

There is a separate marketplace. It is underserved by low-cost money. I don’t know your politics. I stay out of that conversation. What I do know is that if there are low-cost loans, every Republican and Democrat for years has sponsored microloans in foreign countries as part of deals with other heads of state. What if these are microloans in our own country that allow people to get credit for and get accustomed to? They’re held to a standard but a standard that they can meet. Think of it this way. We all love chasing our FICO score. Even though we say that it’s the 5th or 6th most important item being measured, we all love a 780 over a 680. We all love an 820 over a 720. We all do. There’s a point of pride. 

 

For those of you who are working on your fundability™ journey, you’re working on your fundability™ in order to increase the fundability™ of your profile and the score that reflects it, the higher that goes, the better we feel about ourselves. What could we do for our fellow citizens, without taking anything off of anybody’s plate, without any kind of regressive tax on our part or on the administration’s part? What if we could give tens, dozens of millions of our fellow citizens an opportunity to feel the juice we feel when we have a great score? What if we could give them a model that allows them to perk their hearts up and perk up their spirits because they’re getting credit where credit is due? They’re getting the juice. They’re getting the punch. They’re getting the benefit of being able to look themselves in the eye like you and I do. To look themselves in the eye and say, “You’re doing great,” because the model they’re working from allows them to get positive feedback and grow their fundability™ wherever they’re starting. 

If I had a magic wand and the administration does not, I would address this marketplace years ago. As many of you already know and most of us know, our model takes into account the ability to insert any kind of credit modeling. If FICO had one that was more inclusive for this unserved marketplace, we’re right there to teach, help and support every single borrower. I’ve never said I’m just after the 1%. I want every single borrower to know how fundable they are and have a path to get from where they are to their dreams. We stand ready for whoever may be reading, get fundable a call to action. It is a battle cry for all borrowers in this country. It isn’t for middle America. It’s not for the wealthy. It’s not for the ones who have 4, 5, 6 zeros in their banking account. It’s for all of us. It’s for everybody. 

I hope that all this brouhaha is simply a misinterpretation and a misunderstanding of where I want us to see where I want us to go, not just as a country but as a financial marketplace. In my book, I talk about being able to create healing of the relationship between borrowers and lenders. I don’t care where the borrower is and I don’t care who the lender is including and if it happens to be an agency like the SBA or the Sallie Mae for student loans. I don’t care who it is. I want fair and equitable access to capital and a system that allows us to see how well we’re doing and get positive feedback so that we can grow, improve, and expand from wherever we are to wherever we want to end up. Everybody in this country has a Z. I want everybody to experience their Z. 

The beauty of this is nothing’s going to change in this marketplace of lenders, cycle modeling and credit bureaus. It’s business as usual and we’re going to help you become fundable every step of the way. There’s more to do. I’m eager to find out how we can participate and make it happen. I want you to understand this proposal, these ideas. This isn’t the final scene in Fight Club where the end of the movie they’re blowing up Experian, TransUnion and Equifax. This is not that. The system is here to stay. As has happened in the past, there are many examples where the government led the way to address markets that were not addressed by the private sector. 

The private sector began to trust and in this case, what if the top-tier lenders began to trust the model and trust the data? What if everybody began to compete in the space, to give opportunities to our brothers and sisters who have taken a hit financially or grew up in a financial deficit? I’m not going to blame them for their circumstances and I want to give everybody the opportunity to look in the mirror and say, “You did it.“ Thank you for joining me on this episode. 

 Important Links:

• Get Fundable! Bootcamp  
• http://GetFundableBook.com