A marketing director for Experian recently argued in BankThink that marketplace lenders have a duty to report credit data to the consumer reporting agencies. But there are compelling business reasons why an online-based lender might not take that advice and would still be acting in good faith.
To be clear, there is no requirement in regulations implementing both the Fair Credit Reporting Act and the Equal Credit Opportunity Act that marketplace lenders — or any other type of lender — report loan performance data to CRAs.
But a marketplace lender may have other rationale for not reporting.
One of the most important FCRA obligations on furnishers of consumer data to CRAs is not to report data that the furnisher knows or has reasonable cause to believe is inaccurate. Unpacking the meaning of "reasonable cause to believe" and maintaining appropriate policies around data accuracy and integrity can quickly become a challenging compliance project for a lender.
Recent consumer litigation has suggested that furnishers must go to greater lengths than before to ensure data accuracy. For example, an organization might have information in one database that validates accuracy, but it might also have specific knowledge embedded in another separate database that calls into question the accuracy of the same piece of information. If the compliance team is not able to cross-check and reconcile the data between the two systems before it is sent to the CRA, then the institution may have violated FCRA and exposed itself to regulatory enforcement action or private lawsuits.
A lender that reports credit data needs to have a compliance team that not only understands how to cross-check and "scrub" data across systems, but also how to translate proprietary data into the reporting formats required by the major CRAs. Complying with the legal and credit bureau mandates is also not a one-time thing since a lender reporting the data is constantly digesting a flood of new consumer data and managing changes in the institution's interlocking databases.
On top of the initial reporting obligations, a lender that reports credit data must also conduct a proper investigation of consumer disputes, report to the consumer and correct inaccurate data, notify CRAs of a consumer's voluntary closure of an account, and satisfy a host of other obligations applicable to data furnishers, all subject to tight statutory deadlines. Failure to do so can expose the institution to consumer litigation and regulatory enforcement action.
In short, satisfying all of the FCRA's requirements applicable to institutions that furnish information to CRAs is a significant challenge in terms of time and manpower. Given that there is no legal obligation to report, it is hardly surprising that some resource-constrained lenders are choosing not to report at all.
One option for newer lenders interested in reporting credit data is to take the interim step of reporting loan performance only for loans that default and only after they default. It is not clear whether this will satisfy the call for more reporting by the credit bureaus. But it does provide the lender with the added leverage by providing the borrower with the incentive to stay current on a loan, since failure to do so will affect his or her credit score. But lenders should still be careful not to mislead the borrower into believe that all loan performance data - not just the derogatory information - will be reported. The lender should also clearly disclose that it will report derogatory information. If the lender is not abusive, then a practice of only reporting negative data should survive the regulators' scrutiny.
Also, once the lender starts reporting negative information, it must ensure the data is accurate, notify the consumer of the negative report and comply with certain other FCRA obligations, such as responding to consumer disputes of that information.
Still, one cannot rule out the risk that an aggressive regulator like the Consumer Financial Protection Bureau will use a subjective analysis to find that a lender's negative-only data reporting was unfair, deceptive or abusive, particularly if the lender has other practices considered questionable. While only reporting negative data creates less of a compliance burden because there are fewer consumers and less data involved, it still exposes a lender to essentially the same types of risks that comprehensive reporting does.
That's not to say there aren't benefits to more comprehensive reporting. It is no mystery that the credit bureaus are eager for all lenders to report all data because comprehensive reporting will enhance the value of the CRAs' databases. And comprehensive reporting would be useful to the lending industry as a whole if all lenders could see all loans for which a particular borrower is liable. Meanwhile, some studies indicate that consumers would, in the aggregate, generally benefit from comprehensive reporting if we agree that loan pricing tailored to a person's actual credit risk is a good thing. Other studies indicate that data reporting is a particular benefit to the "credit invisible" (people with a thin or nonexistent credit file).
Yet those benefits primarily accrue to parties other than a particular lender that is deciding whether or not to furnish data, such as the credit bureaus themselves. The lender only reaps part of the benefits but must bear 100% of the costs. Perhaps those that benefit from comprehensive data should find a way to share some of the costs.
Daniel Wheeler and John ReVeal are both partners at Bryan Cave.