Lenders and financial institutions take a risk when lending money to consumers with poor credit histories, as their decisions depend on information found within each consumer’s credit reports and scores, such as past delinquencies and collection accounts. The Interesting Info about swish.
Ballard Spahr’s Consumer Finance Monitor helps financial services industry players stay abreast of critical legal news and developments affecting them, like this week’s announcement from the CFPB for personal financial data sharing standards and protections.
Credit Scores
Credit scores play an integral role in lending decisions and lines of credit decisions, and lenders use FICO and VantageScore scores to assess consumer debtors and the likelihood that they’ll repay auto loans and bank cards on time. Both sets of models use data from one credit report in making predictions; updates to these models may occur periodically due to technological advancements or consumer behavior shifts that provide more accurate forecasting capabilities.
A recent Consumer Financial Protection Bureau (CFPB) study discovered that credit scores sold to consumers may differ significantly from what lenders use; when these discrepancies exist, consumers could be misled as to their creditworthiness and overpay or overspend for loans or lines of credit.
As per a LendingTree survey, regular monitoring can save money and enhance financial well-being, yet only 33% of American consumers do this regularly. One reason is people’s unwillingness to share personal information; credit monitoring solutions offer consumers the ability to monitor their scores through digital banking platforms provided by financial institutions, which allows them to do this while creating brand recognition through creating loyalty through education offerings tailored specifically for that individual as well as loan offers optimized to them.
Interest Rates
Interest rates are an integral component of many financial products, including consumer loans and credit cards. Lenders use interest rates to determine how much to charge the borrower in return for postponing consumption of resources when their value may increase, and companies use them as a benchmark to compare debt with equity financing sources and determine which source offers more economical financing solutions.
Market Conduct Supervisors (MCSs), charged with protecting consumers of financial products, place great value in identifying, understanding, and tracking industry developments and consumer risks at the market level – known collectively as market monitoring – as part of their job duties. This allows them to prioritize scarce resources accordingly while following a risk-based approach and increasing effectiveness; moreover, monitoring will enable MCSs to quickly respond to any emerging issues that could create significant distrust among their consumer base or cause irreparable harm at the market level or harm their institutional reputation.
MCS goes beyond traditional tools of supervisory oversight, such as analysis of aggregated indicators provided by FSPs through regulatory reporting, to conduct market monitoring activities to gain insights into consumer experiences with digital finance services, risks associated with them, and possible potential adverse consequences arising out of them. Such efforts include social media monitoring, surveys, and direct consumer engagement through suptech [see Q&A; for suptech].
This toolkit is intended to assist financial supervisors, especially those involved with market monitoring for consumer protection, in understanding the various tools available to them to meet their supervisory objectives. It includes country cases showing how and why supervisors have implemented different monitoring tools, as well as reflections on benefits and challenges related to implementation.
MCS must monitor all aspects of the financial sector to protect vulnerable consumers from unregulated markets or products and practices originating in regulated markets but possessing significant market share within their country or region. Such efforts require shifting focus away from institution-focused supervision toward broad/narrower needs as well as consumer outcomes, risks, and impacts of FSP engagement.
Credit Utilization
Your credit score plays a key role when it comes to whether or not you can obtain loans and the interest rates charged. But lenders consider more factors, including credit utilization (the percentage of available credit you are currently using compared to what is available), often called your “credit utilization ratio,” which represents how much debt you owe divided by how much revolving credit (such as credit cards) you have available (this figure can also be calculated on a per card and overall basis).
Experts generally suggest not exceeding 30% of your credit limit; 10% or below would be ideal. That’s because your credit utilization plays a large part in your score and can send signals to lenders that you may be unable to repay what’s owed on your cards.
Well-managed credit utilization can be achieved by regularly tracking balances and limits as well as using tools provided by credit card companies to manage it. Setting a reminder on your calendar to pay off balances prior to reporting them to credit bureaus each month may help. If unsure, contact customer service at your card issuer for help and find out their reporting dates for reporting credit utilization to credit agencies.
Another effective way to monitor credit utilization is to add up all of the balances on all of your cards and compare them with their respective credit limits. Our free credit utilization calculator makes this task even simpler!
If you’re trying to reduce credit utilization, be mindful that it may take two or three credit statement cycles for card balances to decrease from high levels of debt to lower utilization rates. Therefore, planning for significant purchases and creating a budget that allows for quicker balance pay-off will help bring that point forward faster.
Payments
Consumer finance companies – banks, credit unions, fintechs and nonbanks, alternative lenders, mortgage lenders, and payment providers – face a more complex legal and regulatory environment today than ever before. While product development and market challenges must be managed effectively, they also must contend with industry legislation, sophisticated enforcement by the CFPB and state regulators/attorney general offices, as well as potential private litigation issues. Goodwin’s Consumer Financial Services team–one of the premier in its industry–can help make sense of these changing dynamics to stay one step ahead in terms of risk/opportunities. Goodwin’s Consumer Financial Services team will assist clients in keeping one step ahead.
The Consumer Financial Protection Bureau’s first report on Buy Now, Pay Later debt financing draws upon feedback received through its market monitoring inquiry as well as deidentified submissions from its public complaint database, financial filings of five firms that have received market tracking orders from the Bureau, deidentified submissions from general complaint database submissions and other source material publicly available for evaluation of Buy Now Pay Later products or lenders and public complaints database data for five firms subject to monitoring orders issued by CFPB and publicly available financial filings of five firms which received monitoring orders from market monitoring orders issued by CFPB market monitoring orders from five firms that received market monitoring orders from them. The results aim to aid consumers in making informed decisions when considering Buy Now Pay Later products/lenders and selecting lenders among options presented to them from within. The report highlights critical issues/challenges when considering these products/lenders when making such choices and fixing lenders among these.
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