What Does the End of the CFPB Mean for Credit Risk Innovation?

Less regulation doesn’t have to mean chaos. It could be an opportunity for US lenders to reassess how creditworthiness is defined in a more inclusive and data-informed way.

Michele Tucci, chief strategy officer and co-founder of Credolab, a global device behavioural data and analytics company, looks at how the current regulatory rollback could open the door for lenders to rethink credit scoring and explore new ways to widen access.

The Consumer Financial Protection Bureau (CFPB), long regarded as the regulatory backbone of US financial oversight, is being hollowed out as part of the current Oval office’s large-scale federal spending cuts.

In the past three months, the agency has dropped lawsuits, rescinded longstanding guidance and lost much of its enforcement power due to sweeping cuts. This represents a radical reset of how the US government regulates consumer finance and how it defines its obligation to American consumers.

Established following the 2008 financial crisis, the CFPB was intended to champion consumer rights and punish bad actors. In its quest to bring transparency to financial services, it inadvertently failed one of the country’s most vulnerable groups: Americans considered either ‘credit invisible’ or unscorable, denied access to credit simply because the system had no data on them.

Credit data

Average FICO scores rose from 688 in 2011 to 718 in 2023, suggesting that those already in the system were improving their credit profiles. But the people who needed help the most — those outside the traditional credit model — weren’t lifted by that rising tide.

Between 2015 and 2022, the number of credit invisible Americans jumped from 45 million to 49 million. It’s a staggering increase given the proliferation of alternative data sources that entered the formal credit economy during the same period.

Regulatory inertia is partially to blame for this. Private-sector players like Experian, Equifax and fintechs were pioneering tools that treated data sources (such as rental history, utility bills and cash flow) as valid for building credit scores, but the CFPB failed to encourage or facilitate the adoption of these innovations.

Innovating where protection meets access

Under the CFPB’s innovation-wary paradigm, any deviation from FICO or bureau-based models was cause for scepticism and increased scrutiny. With the CFPB in temporary retreat, lenders may have a window to rethink risk assessment and consider how a broader set of data inputs could help address inclusion gaps responsibly. Whereas the Bureau understandably considered policing abuse its primary purpose, it failed to see that expanding access is the next great financial protection innovation.

The CFPB, wherever it lands, must actively support the responsible use of expanded data. It must reinstate and modernise programmes that allow innovation to thrive under proper guardrails. And it must treat inclusion as a core mandate, not a side benefit.

The missing layer in risk

This thinking applies to more than just positive inclusion. One area in desperate need of innovation is the grey zone between credit risk and fraud. This is colloquially known as ‘Fredit,’ a portmanteau of ‘fraud’ and ‘credit risk,’ and it refers to non-starters – individuals who apply for credit with no intention of eventually repaying it.

These first payment defaulters don’t show up as fraud in traditional models, nor are they captured by legacy risk scoring. They have valid IDs and bank accounts through open banking providers that fool lenders. Detecting these types of risk may require new methods that focus on applicant behaviour during onboarding, even before a loan is disbursed.

Some lenders and researchers have begun to explore how digital behavioural patterns, such as device use consistency or input behaviour, may reveal new indicators of credit risk not captured by traditional models. Crucially, this can be done without accessing personal data, making it privacy-compliant even in a deregulated landscape. Here the CFPB’s emphasis on policing and great security ought to converge with an innovative broadening of data sources.

Regulatory vacuums and avoiding recklessness

Let’s not confuse the rollback of regulation with a licence for recklessness.

The absence of external enforcement should compel lenders to adopt higher internal standards, not lower ones. If the Bureau is no longer looking over lenders’ shoulders, then their models, processes, and safeguards had better be airtight. The real cost of poor risk assessment isn’t a CFBP-levied fine. It’s a portfolio loss.

New emerging approaches to credit scoring may offer greater transparency and accountability than certain AI-driven models, particularly where explainability is critical. That’s key in a market where consumer trust remains fragile.

In the vacuum left by reduced CFPB oversight, some players are already stepping up. For instance, the BNPL provider Affirm recently announced it will begin reporting its short-term, interest-free instalment loans to Experian. This reflects a shift toward greater transparency, giving consumers a clearer pathway to build credit histories and offering lenders additional data for decision-making. Actions like this show that accountability doesn’t have to wait for regulation.

Regulatory vacuums are rare, and they don’t last long. The CFPB has already recovered some ground since its initial defunding, and may still recover more. In the meantime, the US lending industry faces a clear choice: Either wait for the next wave of rules to be written or lead the market by making proactive decisions that prioritise ethics, inclusion, and transparency before new regulations arrive.