The big three U.S. credit bureaus — Equifax, Experian and TransUnion — have long acted as if payday lending does not exist.
The firms compile information on millions of mortgages, auto loans, student loans and credit cards, but not on the expensive short-term credit that often serves as a last resort for those who need cash.
An estimated 45 million U.S. adults lack credit scores. And the large credit bureaus' allergy to payday loans, which appears to be mutual, is one important reason why.
Rules for payday lenders proposed by the Consumer Financial Protection Bureau promise to reshape the payday loan industry and pull it closer to the financial mainstream.
Among the many unanswered questions about the agency's proposal are whether payday lenders will be pulled into the orbit of the big three credit bureaus, and if so, whether that change will benefit subprime borrowers.
The CFPB's 1,300-page proposal envisions a sea change in data collection for an industry that has historically relied on post-dated checks to secure repayment. The industry would be subject to new underwriting rules and restrictions on the rollover of loans that will be impossible to obey without the availability of better data on each borrower.
So the CFPB is proposing that private-sector firms establish new "information systems" — essentially industrywide databases that would play a role somewhat analogous to the big three credit bureaus.
Payday lenders would be required to report their loans to these information systems. The lenders would also have to check the systems to determine whether a customer is eligible for a new loan.
"The requirement does appear to bring a certain kind of borrower that may have been off the grid onto the grid," said John Thompson, senior vice president at the Center for Financial Services Innovation.
The CFPB would also mandate the reporting of certain kinds of small-dollar consumer loans to the big three credit bureaus. And it would require some lenders to pull credit reports from Experian, TransUnion or Equifax.
Assuming the bureau's proposal is adopted, it seems likely that more Americans will be drawn into the mainstream credit reporting system.
The CFPB found last year that 19% of U.S. adults, or 45 million people, do not have a credit score. When people cannot be scored, it is generally because they lack a robust, up-to-date credit report from Experian, Equifax or TransUnion.
Blacks and Hispanics, along with adults with low incomes, are more likely to fall outside of the credit mainstream than the general population, according to the CFPB.
One longstanding gripe about payday lending is that because the lenders do not report to the big three credit bureaus, borrowers do not have the chance to build their credit histories and move into more affordable loan products.
"They can't graduate," said Mario Avila, founding director of the Turner Family Center for Social Ventures at Vanderbilt University.
Moreover, when payday loans get sold to debt collectors, they often do show up on mainstream credit reports. Consequently, the only possible impact of credit reporting on payday borrowers is negative.
Still, the calculus is tricky. Some observers worry that if payday loans are included, the impact on borrowers' credit scores will be negative, even for borrowers who make timely payments. High-cost credit can drag down a traditional credit score, and repeated credit inquiries can do the same.
"We've always been concerned that adding payday loan data to the big three credit reporting files might end up hurting consumers," said Chi Chi Wu, an attorney at the National Consumer Law Center.
Industry officials pointed to a number of potential explanations for why payday lenders have long operated outside of the mainstream credit reporting system.
The head of a trade group whose members include Equifax, Experian and TransUnion said that the three firms are not set up to handle short-term loans.
"The credit reporting industry evolved around loans that all have a term that is longer than a single 30-day period," said Stuart Pratt, president of the Consumer Data Industry Association.
A payday lending industry executive said: "My assumption is that [the big bureaus] have a negative stigma related to customers who have used short-term financial products, at least historically."
Other observers said that payday lenders may be reluctant to participate because of the relatively high cost of purchasing credit reports — as much as $15 per customer — or because it can be difficult to get credentialed by the credit bureaus.
Whatever the reasons for the separation, a lower-tier credit reporting system has emerged to fill the void. Payday lenders do report to subprime bureaus such as Clarity Services and CoreLogic Teletrack.
One key unanswered question about the CFPB's plan is how private-sector firms will respond to the call for industrywide reporting.
The proposal states that the new information systems will have to register with the bureau and comply with the Fair Credit Reporting Act. But companies will have to make their own decisions about whether to participate.
Pratt said it is too early to say whether the big three bureaus will seek to become registered information systems. Equifax, Experian and TransUnion declined to comment for this article.