Modern credit reporting: Can old tech handle new data?

[00:00] Christian Widhalm:
Something as silly as, hey, you are listed as 60 days delinquent on an account, but that account was actually open two weeks ago. It doesn’t make sense.

[00:12] Narrator:
Welcome to 22 Minutes in Lending, your go-to podcast for insights on all things lending. From lending practices, regulatory updates, how to enhance lending efforts and more. In each episode, Vince Passione connects with industry leaders to discuss the latest trends and happenings around the lending industry. Let’s dive in to the latest in lending.

[00:35] Vince Passione:
Welcome everyone to 22 Minutes in Lending. I’m your host, Vince Passione. I’m excited to have Christian Widhalm join us today, Christian’s, the CEO of Bloom Credit, a position he’s held since July of 2021. Bring you with him an impressive 15-year track record in the FinTech space. I’ve had the pleasure working with Christian during his eleven-year tenure at LendKey where he held a position of chief revenue officer. Christian, it’s always great to see you and I look forward to hearing your insights today.

[01:01] Christian Widhalm:
Vince, it’s always great to chat with you. I’m very much looking forward to this.

[01:04] Vince Passione:
Awesome. Well, let’s get started these 22 Minutes in Lending Christian. So first topic is really the problem you’re trying to solve, and we certainly have talked about it during my tenure or your tenure at LendKey and then subsequently as you started Bloom Credit. But lots of discussion. I just saw, I was doing some research, Consumer Reports had a study they just published past April and they said that about 1/4 of the people find really serious mistakes in their credit reports. And then the CFPB has a lot to say about it. They say it’s probably the number one consumer complaint that they receive is about inaccuracy in their credit reports.

[01:37] Vince Passione:
And then I’m old enough to remember, well not quite that old, but FCRA was passed 50 years ago about concerns about just credit reporting companies. So you’ve talked about Bloom with me. You’ve talked about rewiring how companies access and use and furnish credit data. Talk to me about the problem and talk to me about the solutions that you guys have come up with Bloom Credit.

[2:00] Christian Widhalm:
Yeah, absolutely. And the issues with credit reporting and inaccuracies are definitely real. A lot of consumers in the United States basically have what is oftentimes illogical or nonsensical information that’s actually on their credit reports that it’s no fault of their own. The rails that credit data is transmitted on really follows a format called Metro 2. So I won’t get into industry jargon too much because there’s probably a bunch of it, but that is 26 years old and it was never designed to take in new types of data that we actually see today in the market. Alternative data, novel financial products, repayment information on these types of credit issuance that’s going out to consumers. It was really designed for traditional payments. Things like credit cards, loans, whatnot, and even those, it doesn’t do necessarily the greatest job at all the time and it impacts a lot of consumers negatively.

[02:52] Christian Widhalm:
And you see it in those reports and also the scrutiny that’s actually coming from the regulators and folks like the CFPB. The issue with even traditional reporting is this nonsensical and illogical stuff that actually ultimately gets put into the system that people aren’t really catching and it ultimately hurts the consumers, their credit history and subsequently their credit score, which obviously makes them actually pay higher prices for credit and sometimes get outright declined for credit. And some of those examples could be… I’ll give you real ones that we see all the time and help all of our clients with. Something as silly as, hey, you are listed as 60 days delinquent on an account, but that account was actually open two weeks ago. It doesn’t make sense. Someone is listed as 90 days delinquent, but they’ve been current the last three months. There is a significant amount of those types of errors, in addition to others that actually happened, because you’ve got all these disparate systems that are on one side, the loan origination systems, loan management, loan servicing systems, all this stuff that’s actually being generated from all these different systems.

[03:59] Christian Widhalm:
Then you’ve got the bureaus who have their own rigid business processes and you’ve got this 400 page guideline that people are trying to follow in order to actually report credit data. And ultimately what happens is that there is this impedance mismatch between getting the data from here to the other side. And that’s where a lot of these issues happen is that no fault of the consumer. Oftentimes lenders think that they’re doing it well and we find that they oftentimes are very much not doing it well and ultimately, leads to these issues for the consumer. Again, that no fault of their own.

[04:28] Vince Passione:
Now Christian, is this limited to just Fintechs who are new that are trying to get their arms around Metro 2 reporting and the complexities of it. Because Fintechs are relatively new and this issue with consumer credit reporting and accuracy has been around for a long time. As we said, FCRA went into effect 50 years ago to protect consumers against this. So is it just the Fintechs or credit card companies are still making the mistakes? I mean, auto lenders are making mistakes and if they aren’t, why? I mean you would think by now they’ve got it down.

[05:01] Christian Widhalm:
They absolutely are making those mistakes even at the more established lenders. I’ll give you an example without naming any names of course, but one of the services that we provide to prospects when we’re talking to people that reach out to us to see if we can help them with their reporting, we’ll say, “Hey, we’ll provide you with a free audit. We’ll take your existing Metro 2 file, your existing submission that you’re sending to the credit bureaus, and we’ll run it through our processes.” I think now 800 data quality and validation checks that we actually run the data to make sure it’s correct. We also look at it usually in sequencing, not usually we look at every time in sequencing. So we look at what did all your last 10 files say, and are they actually making sense sequentially so it’s not just on the file at hand.

[05:44] Christian Widhalm:
So for this particular audit I’m talking about, we just looked at the file at hand. We didn’t look to see what happened beforehand. The lender has been in the business for 25 years and they use a loan management system that’s been in the business for about 40 years and has over, I think over a trillion dollars worth of loans outstanding on their system for their lender clients. And we found 22% of the files that we actually reviewed in the audit had inconsistencies that were problematic within the Metro 2 format. And some of those were bad enough around bankruptcies and things that they were negatively impacting the customer.

[06:20] Chrisitan Widhalm:
And one of the things too is that I think that the bureaus have a pretty good handle on a lot of the major players, but the major players call it the major money center banks. People are the big lenders in the country. They can focus on those because they’re single files, they can look at anomalies and whatnot. But then you’ve got this giant enormous long tail where there’s just not the resources available or the systems or the ability to actually really go and really fine tune all that. So what we’ve basically been creating is a new standard of care that we think is the right path for the consumer, for lenders, for everybody within the ecosystem to make sure that the data is accurate and not hurting anyone because even if it’s hurting the consumer, it’s also hurting lenders who are making incorrect lending decisions and assessing people incorrectly for credit risk, saying no to loans, mispricing people for loans and not closing a potential loan that they could.

[07:11] Vince Passione:
So tell me a little bit about what’s the secret sauce? Are you guys just better at this? Do you have better quality control? Why is Bloom good at making certain that what’s being reported to the bureaus is in proper format and you’re picking up all these anomalies?

[07:25] Christian Widhalm:
We built it for problems that people are actually facing right now. We built it to be very nimble. We built it to take actually the problem of that impedance mismatch from all of these different systems out of the equation. So it’s a single API. And we’re a bidirectional API, meaning that our clients can actually pull from data from the major credit bureaus through one API for all three of the bureaus in a standardized format, so that regardless of who you’re pulling from, you get the exact same information. So it goes into your decisioning engine. So you can switch between bureaus or switch to another one for cost reasons or redundancy or whatever it is that you want to. On the reporting side, it’s the same thing. Single integration, we report to all three bureaus plus a novice, so I guess four.

[08:07] Christian Widhalm:
And what we do is that we actually take the raw data from the systems of record. So this is stuff coming directly out of the loan management system. Things are effectively on a statement. We don’t require our clients to understand or know anything about Metro 2 or that side of credit reporting. We handle all of that. So all they’re doing is actually coding their raw data into our API and then, we do all the transformations and all the validations in advance. And what we actually do is before a file is ever submitted to the bureaus, we run it through those validations. And then anything that gets kicked out, like a sample report could be, “Hey, here’s the summary of what was submitted, 98.4%,” I’m making it up, “98.4% success rate, 1.6% of file failed. Here’s all of the unique consumer IDs. Here is why it failed,” because maybe some of those illogical, nonsensical examples that I gave you, it could be a million things that came out of the system, “And here’s how you fix it.”

[09:09] Christian Widhalm:
And then the client is required to do a update and a patch to make sure that that information is correct. And what we find, and this obviously intuitively makes sense, is when people come to us for the first time, we see higher levels of errors in the up to 40 or 50% sometimes in terms of inconsistencies. Now, not all of those will have a negative impact on the consumer rate, don’t want to mislead you and say that’s the case. It’s usually a smaller percentage of that. But they then take that information that we provide them and they go out to their system and they start fixing it and they start finding systemic problems that have been in the system for who knows how long. And then over time, each month that we continue to go and report the data, those numbers inevitably get smaller until they’re basically zero.

[09:56] Jim Merrill:
This is Jim Merrill, president and CEO of Inspire Federal Credit. For the last 13 years, we’ve partnered with LendKey to elevate our lending services and strengthen our commitment to providing the best financial solutions for our members. The team at LendKey is not only knowledgeable and responsive but also genuinely committed to our success. They have empowered us to better serve our members and have been a true partner, not just another vendor.

[10:27] Vince Passione:
Once again, I’m old enough to remember some of these older companies like L2C, that was probably one of the first companies out there that said, “We can use things like bill payment information, alternative payments to create predictive models,” and then we use Experian Boost and we certainly have seen things like UltraFICO. So talk to me a little bit about Bloom Plus and what that means to the consumer and why does it matter? Certainly looking at FICO scores, we know that payments are a big percentage of that score. Obviously we’re missing some of those because you’re picking up some of them and reporting them, but talk about Bloom Plus and what that means to the consumer.

[11:05] Christian Widhalm:
So ultimately with Bloom Plus, Bloom Plus leverages the rails that we have actually already built for our APIs and all of our infrastructure. So it’s a new product offering that we saw fit for in the market. And then to be candid, one of the bureaus came to us and was like, “Hey. You guys are literally the best that we know at being able to take in all this different type of data that’s not traditional and then make it into stuff that actually works within the bureaus. Do you think you could do it with DDA accounts, the information from checking accounts?” The reason that’s important why we did it is that as you know, there’s been this convergence over the last, what, 10 years of data that’s alternative data starting to be used in credit decisions. And obviously anything used in a credit decision needs to be treated correctly with FCRA and whatnot.

[11:52] Christian Widhalm:
But it also needs to figure out how do you actually get those types of data into repositories correctly, because they were never designed to go into those repositories. And those could be novel financial products, could be credit builder cards that are new, could be BNPL, could be checking account data for cash flow purposes. What we have done with Bloom Plus is to enable consumers to demonstrate credit worthiness in new ways. And specifically this is by looking at their transactions and their checking account, specifically recurring monthly obligations, so recurring monthly obligations or things like rent, telco, utilities. So those three things can actually be reported to the major credit bureaus and they can actually be established as tradelines.

[12:42] Christian Widhalm:
So we go through identify for the consumer, all of these transactions that are actually being made from their checking accounts, their DDAs, and then we categorize, we put some enrichment services over them, we provide further verification validation, and then we curate and show them in their experience, here’s all the stuff that we think that you can actually start reporting to the major credit bureaus.

[13:04] Vince Passione:
The FI is going to offer it through their home banking package, and my financial institution would offer it to me through my home banking package so I can opt into it and I’m in control.

[13:16] Christian Widhalm:
That’s absolutely correct. And we did it so that it’s white labeled. We have a no-code and low-code solution option. The no-code solution option, and FI can be live within 24 hours of signing a deal. As you know, that is highly unlikely given sometimes the speed of going to market, but we can get them live within 24 hours. It’s fully hosted, white labeled for the FI, and they can start promoting it through digital banking, through text messages, emails. We have QR codes on branch, collateral statement stuffers, all that fun stuff for them to enter the experience.

[13:49] Vince Passione:
Now my favorite topic usually comes up, buy now, pay later. Lots of discussions about credit reporting. We saw Apple was one of the first BNPL providers that said it was going to start reporting it. The CFPB announced this new rule on BNPL lenders. We’re not really seeing though much in the way of the stuff showing up on these reports yet. So what’s your opinion on BNPL reporting and the impact, the true impact that we probably don’t see today on BNPL to the consumer’s credit score?

[14:20] Christian Widhalm:
This could be its own show. So it’s really interesting, and I probably know too much about this particular topic. Probably about four years ago, the CFPB started being critical of saying, “Hey. There’s all these payments to these BNPLs that are going on and loans being taken out that are not being reported to the major credit bureaus, and we need them to be reported to the major credit bureaus.” And it was the CFPB really leading the charge and putting heat on the BNPLs and the bureaus to figure it out.

[14:51] Christian Widhalm:
One of the things that first popped up, they were like, “Wait a second, these products were never designed to go into the bureaus.” And they’re like, “Why were they not designed to go on the bureaus?” Well, they are paying for paying six short-term one to two month loans where people are taking them out. Imagine if you used to BNPL seven times in a year, eight times, whatever the number is. You are effectively opening a new credit product and then in the eyes of the scoring companies, you’re opening a new credit product and then you’re closing it immediately. What are some of the things that are red flags and could lower your scores? Opening up a bunch of credit products and actually the average length or history of your trade lines is ultimately going down.

[15:38] Christian Widhalm:
So everyone was like, “Wait, wait, wait. We need to figure this out a little bit better right before we start to do this.” And then each of the bureaus took their own approach. I think each of the bureaus wanted to win BNPL, like say, “Hey. We’re going to figure out the standard for this.” And they each went their own way. And the funny thing that happened with that was it gave the BNPLs more room to say, “Wait a second, all three of you’re coming with your own proposals to us. They’re all different. Why don’t you guys figure out a unified approach and we’ll sit back. We’re not going to do anything until that happens.”

[16:09] Christian Widhalm:
Well, while the bureaus were staredown with each other figuring it out, the CFPB got onto another shiny object and stopped looking at BNPL reporting. And ultimately that’s still where we’re at. There’s more reasons why it’s not happening yet. In places that they don’t talk about at parties, the BNPLs, one of the reasons they won’t do it is because they also realize that the data that they have is actually valuable and that if it gets the bureaus, the bureaus potentially are going to be selling it for marketing purposes. And there’s all these fears that they could sell it to the cap ones of the world, the PayPal’s, whoever it is that can start going and poaching their clients.

[16:52] Christian Widhalm:
So it’s just been a confluence of reasons that this standoff has existed, but BNPL has been gaining a lot of momentum with consumers in the United States. And I mean, it’s in the hundreds of millions of transactions that are occurring on BNPL on an annual basis. You start to think about that from different perspectives. Economists have no idea what people have, what they’re looking at, what the outstanding balance is, what people are taking out, how they’re actually paying. Lenders have no idea what these obligations are. The credit bureaus obviously have no idea.

[17:28] Christian Widhalm:
So there needs to be something that ultimately happens. And the CFPB, one that you were talking about, I believe, was around disputes saying that, “Hey. BNPL is the equivalent of credit cards. So the dispute process needs to be effectively the same. And here’s our take on it.” We think that there is a clear, unified way, and we’ve been talking with the bureaus, all three of them about this, about ways that actually Bloom can actually help these BNPLs take that data, make sure it’s actually clean, accurate, and get into the system. But there’s still going to be a little bit of cat and mouse over I think, how the data is ultimately used.

[18:07] Vince Passione:
Of course, at some point though, the BNPL providers themselves must, I mean they’re also users of this credit reporting data. They’re extending credit to these consumers. They’re putting their money at risk. So you would think that they’d also have a vested interest in making sure that the information they’re seeing on the credit wordiness of this consumer is accurate and as it’s growing, without having it reported. I mean, every lender’s at risk that this consumer might be over-leveraged, but we just don’t know it.

[18:36] Christian Widhalm:
Yeah. So I don’t want to speak for every BNPL here, but specifically on most of them on the paying for paying six, they’re not really pulling credit data or information on the person really that much. It’s not like they’re pulling traditional stuff. On the longer duration stuff, that’s going to be more look like an installment loan. Yeah, that’s the case. Right now, they know if someone went bad with them, they know if a consumer didn’t repay. And I think that there’s opportunities that even if they don’t report to the major bureaus, there is consortium opportunities that they could actually potentially share data with each other in a co-op petition type format that could say, “Hey. Here’s a list of people that went bad as borrowers for us. Let me see what yours are.” Every time I’m going to actually do an origination of one of these BNPL products, I’m going to ping this and see did that person… They have $600 in losses this other BNPL, I’m going to use that in my decision to say whether I’m going to give them a loan or not.

[19:37] Vince Passione:
Listen, we’re getting close on time. So let’s get down to the last question. So our audience banks, credit unions, any thoughts on major changes in credit reporting, either functionality or legislative changes coming down the pike that credit unions and banks need to be focused on right now?

[19:54] Christian Widhalm:
Good question. We live in this world where we have these four-year cycles with the elections. So from the CFPB perspective, who knows what the CFPB will look like come January 20 after 19 through 21st, whatever the inauguration day is. The CFPB and the director have been very critical of credit reporting in general, both on the bureau side as well as on the lenders who are supplying the data. And that’s also, as you know, nothing really moves super quickly, especially something that’s established as the US financial system. You’ve got all these core service providers and folks that are sitting here with 10,000 banks and credit unions combined serving them.

[20:41] Christian Widhalm:
So I don’t think anything will happen overnight. And I think also some of it’ll depend on obviously what the results of the election. But I suspect based upon conversations that I have had that the CFPB will probably continue to scrutinize this pretty heavily. And I would imagine that at some point there will be called a new standard of care in terms of making sure that everything goes through proper validation tools that’s not hurting the consumers. And there’s nothing here that’s actually causing the cost of credit to go up for people that was not at the fault of their own.

[21:18] Vince Passione:
So what does that mean for Bloom? Product opportunities in there for Bloom or not?

[21:23] Christian Widhalm:
Yeah, 100%. I mean, look, the reality for us is that, I mentioned this earlier, but unless you’re a top 25 bank, you’re not building your own technology. You’re relying on the FISSers, FISs, Jack Henrys, whatever. Those folks have a bunch of cores. Some of those cores have been around for a while and they’ve got different plugins and different things that they actually use for different types of things. It takes a while to be able to go and get into those new cores with, like infrastructure like ours, just inevitable. It takes a bit. But I think the one thing that we continue to demonstrate over and over again, which is shocking to me, that we’re a 25 person company. I’ve been at this for three years now, and we have a very good reputation within the space, and we have a very good reputation with the major credit bureaus who actually look at us as this multi-lane innovator that is actually solving a bunch of problems that the ecosystem faces today.

[22:21] Christian Widhalm:
And we’ve become folks that the bureaus come to for advice on how to do stuff. And I mean that in a positive way, not that the bureaus don’t know what they’re doing, they absolutely 100% do. But we’re a smaller, nimble team that just lives eats and breathes this stuff, and we’ve built technology that can actually really be beneficial for all of them. So, yeah, I think that over time, especially as new integrations take place for things like credit reporting and folks, if there’s more scrutiny on it and there’s actually more regulatory fire behind it, that it’s going to open the doors for the best solutions to rise to the top that really solve this problem and protect the consumer, but also protect the lenders and everybody else.

[23:04] Christian Widhalm:
Look, no one likes disputes. No one likes FCRA complaints, CFPB complaints. No one wants to deal with it. That’s not what anyone’s in the business for. They don’t want to hurt their consumer. They want to one help their consumer, especially credit unions. So I think that over time, I envision us as becoming the, easy for me to say, but the de facto platform that basically credit data is transmitted on.

[23:28] Vince Passione:
Look, an important space and an important part of the ecosystem for lending. So I appreciate the time, Christian. You’ve done a great deal in the last four years, so congratulations to you. Thanks again for being on. Thanks to our listeners. Don’t forget to subscribe so you can enjoy future episodes. And I meet you back here in our next 22 Minutes in Lending. Christian, thanks again.

[23:49] Christian Widhalm:
Thanks, Vince. Appreciate it.

[23:51] Narrator:
Thank you for listening to the 22 Minutes in Lending podcast. We hope you enjoyed today’s episode. You’ll find links to any resources mentioned in the show notes. If you’re enjoying our show, be sure to subscribe and leave us a five-star review.