Adam Parks (00:08)
Hello everyone, Adam Parks here with another episode of Receivables Podcast. Today I am here with a financial services legend we're going to expand beyond just looking at debt collection and receivables, but talking about the credit ecosystem at the whole. So I was lucky enough to have Mr. Dan Smith, the CEO of the CDIA joining us today. How you doing today, Dan?
Dan Smith (00:30)
Doing great, Adam. How are you?
Adam Parks (00:32)
I can't complain. I've really enjoyed getting an opportunity to know you a little bit through the last few years through attending a couple of different events to together and having a chance to kind of have some sidebars and just to better understand your perspectives on the industry and financial services as a whole. It's been enlightening for me and I really do appreciate you coming on to share your insights with our audience as well.
Dan Smith (00:58)
Glad to be here. Thanks for having me.
Adam Parks (01:00)
Absolutely, for anyone who has not been as lucky as me to get to know you a little bit through the years here, can you tell everyone a little about yourself and how you got to the seat that you're in today?
Dan Smith (01:10)
Sure. many years ago, I was a baby lobbyist on Capitol Hill and then I worked for a lobbying firm in all 50 states in the direct marketing and publishing area. And then as the years quickly went by, life changes, we have financial crisis, we have companies that aren't always doing so well. And I took a shift in my career and I went
during the financial crisis to work at Freddie Mac. So one of those people that joined while the ship was sinking, though it's still floating in many a new fashion, went there from 09 to 13, where I learned a heck of a lot about housing finance, the secondary market and how it operates. I learned a lot about state issues in the mortgage and housing industry, worked on short sales.
in REOs and helped the company understand what was going on on the ground during the financial crisis in this what are called the sand states, how realtors and consumers were dealing with the financial crisis, helping them understand ways to improve the process. Met some great people and one of them happened to be a woman named Zixta Martinez.
who up until recently was the Deputy Director at CFPB. Back in 2012, she left Freddie Mac to go to Treasury to start up the CFPB. And in 2013, she was hiring for a newly created office and encouraged me to apply, and I did. And I was the Assistant Director at the Consumer Financial Protection Bureau for a newly created office known as the Office of
Industry Relations or OFIBL, so was Financial Institutions and Business Liaison. So I was within external affairs and I managed the relationship with industry and the CFPB, spent six years, worked with Richard Cordray, Mick Mulvaney and Kathy Graniger, left in 19 to go to the American Bankers Association to run the Card Policy Council, which was, is a...
subsidiary of ABA for the large credit card issuers and the four networks. Left there in late 2020, early 2020 and went to the Consumer Bankers Association to head up regulatory affairs. That was on March 1 of 2020 and guess what happened? COVID. So I spent the next two years dealing with everything in the banking space.
Adam Parks (03:42)
You
Dan Smith (03:48)
from the economic impact payments, the STEMI checks, and the PPP loans, and all the policies associated with that, and many of the issues that the consumer banking world dealt with from 2020 to 2023. And then I was fortunate enough to have this opportunity in June of 2023 to join the Consumer Data Industry Association as its President and CEO.
Dan Smith (04:15)
We are a leading trade association for the credit reporting and consumer reporting industry, representing not just the three national credit bureaus, but any company that is a credit reporting agency under the Fair Credit Reporting Act.
Adam Parks (04:30)
Interesting. It sounds like you have spent a fair amount of time doing crisis management.
Dan Smith (04:35)
I sure have. Yeah, I'm the fireman that goes into the burning building or joins the entity that is either a startup or is having a lot of trouble. For some reason, I find trouble wherever I go.
Adam Parks (04:48)
Well, it sounds like you're there to help smooth some of that out. so with with CDIA now, your focus is on credit reporting, which is obviously also been in crisis management mode over the past year or so as we look at medical credit reporting and some of the other attacks on on the credit reporting space. Talk to me a little about CDIA and what your focus is there as an organization.
Dan Smith (05:12)
So I think the big focus is trying to help people understand why the credit reporting system is the best in the world and how it functions and how it's so critical to our society and putting people in homes. I'd like to remind people that if they have a cell phone, they could pick it up today right now while they're listening to me talk and they can get a credit card and they can use it instantly. And that is because of the credit reporting system.
Without it, lender wouldn't be able to determine your credit worthiness. And they would have to talk to you on the phone, maybe even in person. They'd have to get pay stubs. But they'd have to do so much research just to analyze whether or not they're willing to extend a loan to you. So the credit reporting system, inclusive of credit scores, has made that actually the simplest thing to do. You can walk into an auto dealer right now. and walk out with a $60,000 car. Majority of the reason of that is because of the credit reporting system.
Adam Parks (06:09)
And lending is a risk versus reward probability. And if we're going to lend money, there's risk to that. And we have to be able to pull back on it. And I always tell people from a debt collection perspective, the lenders have two levers that they can pull the availability of credit, and the interest rate that they're going to charge for that credit. But those are really the only two levers that they have. And it's been at least my personal opinion that as I've watched the government attack credit reporting in general and try to remove things from the credit report, all they're ultimately doing is impacting my ability to lend to a segment of the population that ultimately they believe they're trying to protect. Is the government receptive to the understanding of what it really means to have a credit score and the value that that provides to a credit-based economy?
Dan Smith (06:58)
It really depends on who you talk to. I think if you can sit down and talk about the fundamentals of the credit reporting system, how it operates, why it was developed over 60, 70, 80 years, how credit has become more available nationwide, and talk about the strength of the credit reporting system and how it makes our country stronger.
Adam Parks (07:00)
Fair statement.
Dan Smith (07:22)
they look at it differently than why is my score X or why was I denied? Most of the time a consumer or a constituent of a policymaker, they complain about the credit reporting system. I got denied a loan, it's gotta be my score, right? Rather than looking at going, well, that score is such a huge benefit to all of society and look at all the value it brings. Let's focus on that and see how we can work with every consumer to improve their credit worthiness.
Adam Parks (07:52)
They're more concerned with the exception than the rule. Just a kind of a strange place to be when you consider that most of those individuals wouldn't have access to vehicles and homes and other things, right? Even being able to rent an apartment requires going through some sort of a credit check. And the more that we deteriorate the value of the components of that credit report, Cause I mean, the score I think is one part of it and you know, there's all different kinds of scoring models and whatnot, but the collection and management of that information has to be a monumental task.
Dan Smith (08:25)
Without the information in the reports, that score does not get developed. And if you start picking and choosing what should be on there, the lender is going to lose confidence in the underlying score number and the report itself. So then when they evaluate the credit worthiness of somebody, they're going to have questions in their mind. So as you pointed out, there's two things they can do. They can pull back or restrain how much they lend.
because they can't manage their risk and or they'll charge a higher interest rate. So the more they know and the better a picture or a lens they have into that potential customer and their ability to repay the loan and their willingness and their credit worthiness, the better that picture is and the more accurate it is, the lower the interest rate you're going to get. Because the market will drive the price down because there's more competition.
Dan Smith (09:20)
and I and everybody else can use that same information to compete against.
Adam Parks (09:25)
Every time I speak before a room of consumers about credit or finance, I always like to bring up for them really the not only the value of the credit reporting system, but the volume of tools that are now available for people to manage their own credit. 25 years ago, there was limitations and all of the tools that were available. But now your ability to easily go online, pull your credit report, evaluate it, identify if there is something either inaccurate or something that you need to be working on to improve the quality of your credit. Because the cost of bad credit, is something else that people don't look at the way that they should. Both the consumers and potentially the regulators as well. How much more is it going to cost that consumer if they've got bad credit? But like you talked about the level of trust in the score and in the report. I mean, isn't all credit systems built on a level of trust?
Dan Smith (10:21)
Yeah, they are. And understanding and knowledge and information. I got a quick story to tell you about the amount of information the consumer has now. Back in 2013, I had just started with the CFPB and I get a phone call from Richard Cordray. I was assistant director and I had a lot of engagements with him and worked with him closely. But he calls me on a Friday and he says, you know, we had this meeting last week and Discover and Barclay cards gives away free credit scores to their customers. Why is that? Why can't all banks do it? And it turns out that FICO changed their contracts with their lenders and they are allowed to. So what did we do? We wrote a letter to the top 25 CEOs of the largest banks in the country encouraging them to give their scores out for free to their customers.
And by June of that summer, where we had about 60 million consumers getting access to their scores or 60 million scores available, by a year and a half later, there about 300 million scores available to consumers. So now everybody knows their score, right? It's an important tool and it's an important piece that the score leads to a better credit report, which leads to better performance.
Adam Parks (11:32)
Wow. Yeah.
Dan Smith (11:42)
performance and an understanding of why you need to pay your bills on time and the consequences and the effects and taking too much credit and understanding the credit system a little better. And the more we do that, the better the consumer is going to perform. And we lift everybody up. We can't just arbitrarily decide to take something off and hope that their score goes up because of it. That's an artificial score at that point. It's not a true picture.
What we want in society is an accurate picture of the consumer. If it's a 720, it's a 720. If it's a 750, it's a 750. We don't want someone that looks like a 720, but their number's a 750 because they're really a 720. And this is really important because if we artificially inflate a score by taking out information, right, because there is a movement to remove information because the score will go up.
So what is the lender going to do? They're going to go, wow, I have no idea whether or not that consumer can afford this loan because I don't have a clear picture. I'm going to treat that 750 as a 720. They're going to regulate it themselves. That's right. We can't trust that number as a 750 anymore, so we're going to treat it as a 720.
Adam Parks (12:51)
They're going to manage their own risk. There's no question about it.
It makes a lot of sense when you think about it from that perspective. as we start, and then my next question becomes, when does it stop? If we're going to remove one thing from the credit report, where does it end?
Dan Smith (13:09)
So
that's your big problem. If the Fair Credit Reporting Act was passed with clear understanding of what is included and what can and how it can be used, what are the permissible purposes, what's defined as a credit report. There's clear statutory language on what it is or what it can't be. And if you do those things, you are under the rules of that law.
Other entities decide what can and can't be on there, then you lose the complete value of it because you're not able to compare apples to apples. It's not a national view or a standard to look at of a consumer. How do I judge consumer A versus consumer B or those types of consumers and how do I decide what the risk is for that person if the data is all different?
Adam Parks (13:42)
So standard. And isn't it going to, I mean, removing some of that data, wouldn't that create a disparaging impact for some consumers? Because no matter how you break it down, when you start stepping away from the truth, there's going to be some slant or bias to the end result.
Dan Smith (14:13)
That's a great question. Yeah, I mean, if you're looking at one report and it's got some types of information and another one has different types of information, your decision making is going to get thrown off because you're not able to compare across the spectrum as easily. And so you're going to have to mitigate your risks. You're going to look at other data factors that may bring in a bias.
Dan Smith (14:41)
If you look back to the 1950s, 1940s, your grandparents, your great grandparents, they'd walk into a bank and they wanted a loan or they wanted to open a bank account. If the banker knew them or they knew your father or your uncle, they might give it to you. So part of the growth of the credit in our country started in the retail space where they wanted to extend credit, but they had to be able to validate and verify their customers.
Dan Smith (15:09)
credit worthiness. So when you start degrading that ability, they're going to default back to what do need to do to protect my risk that I'm taking on the loan. And your bigger problem falls back to the credit reporting system is 100 % voluntary. There is no law in this country that requires any lender to submit the data into the credit bureaus. It's all voluntary.
And the financial institution started it almost 100 years ago, if not more. They started it mostly regionally to get a better picture of the people in the region, and it's expanded to national. And they did it because they got the benefit of using it on the back end to help mitigate their risk. They didn't just have the information that they could get from the consumer, but they had all of the lending that the consumer did with everybody else in the community.
so they had a better picture to make a better judgment. I voluntarily give it to this end to benefit on the back end. If you start pulling out stuff here and make it less valuable, what takes away my incentive from giving it on the front end? Why am I doing this, taking on the risk of the FCRA, right? The regulatory burden, the private right of action liability, the dispute process, the accuracy requirements.
Dan Smith (16:32)
CFPB oversight if I'm not going to get the value out of it on the back end. So you have this very balance act you got to do is I'm going to give it. I'm a large bank because I benefit it over here. I'm getting into the system to get a benefit from it. If this gets degraded, I'm going to rethink whether or not I'm going to give it. That's the biggest risk is if the lenders say, I don't see the value, I'm going to stop and it all just collapses. And how do we do loans at that part?
Dan Smith (17:01)
At that point, we have to then call the customer and say, I need your pay stubs. need, you know, how much income it's going to be worse than a mortgage to get a credit card or an auto.
Adam Parks (17:07)
It's like going through your first mortgage again.
It's a scary thought when we look at, know, how do you, if you start to deteriorate that value, what does that do to the economy in general when the availability of credit isn't there? And I look at the, to me, the credit score is about being able to predict the behavior, the payment behavior of that consumer in the future. So I'm looking at an individual and I'm trying to predict whether or not they're going to pay their loan, whether or not they're going to pay it on time. You know, what kind of challenges am I going to have through that lending?
Now, let me throw another monkey wrench in there is what impact do you think the reintroduction of student loan debt at the federal level is gonna have on this? And do you feel that any adjustments should be made or is it's the responsibility of the consumer, right? Like they've been responsible for it just because they wouldn't take your payment or they weren't doing payments for a period.
Dan Smith (18:04)
It's great example when politics gets involved in the financial system. Politics said, we don't think the people should be harmed by their student loans. So we're going to mandate that you can't include that in the credit report. So it becomes blind. So the score is artificially inflated.
Adam Parks (18:26)
It's another artificial inflation, but of significant value. We're not talking about a $3,000 credit card anymore. We're talking about six figures.
Dan Smith (18:33)
That's right. So what does lender do? They have to sort of guess on how much of an impact might that have on a person's ability to pay if they still owe that loan. Now we've gone through a period over the last couple of years where they've all been in forbearance and through COVID. So it's been a unique time. Those payments weren't due. People had more liquidity, right? They had their stimmy checks. They didn't have to pay their mortgage. They didn't have to pay their student.
Adam Parks (19:00)
Yeah, and it inflated car
values.
Dan Smith (19:03)
What did they do? You know how the average consumer responded?
Adam Parks (19:08)
They bought a car.
Dan Smith (19:09)
They took out more debt. It didn't mean they
could afford more debt. They just took out more debt because they had more cash.
Adam Parks (19:15)
If you look at the timing of the student loan forbearance and you look at the timing of the auto market inflating above MSRP, those things fall in direct correlation on a timeline.
Dan Smith (19:26)
Right, so now three years later, student loans go back on the credit reports. People now are going into default because they're not paying their student loans. Their credit scores are dropping. Right, they now have these payments they can't afford because they had that new car loan that's now three years old, overvalued. Right, so they're underwater in the car. They have the student loans. Right, and all of this because the policymaker thought it made sense to not report something.
Dan Smith (19:52)
If they had just reported, kept reporting them, but put them into a forbearance status, it would have at least been visual to a lender knowing, okay, we know they're in forbearance and they owe $150,000. At some point, they're gonna come out of forbearance and they're gonna owe it. We should be factoring that into the auto loan. But they hid it completely. They said, you can't report it. That's the problem when policymakers use it as a tool for election and for...
Adam Parks (20:10)
can be due.
Dan Smith (20:22)
getting the sympathy of consumers. They're not thinking even from a rational business decision. So that's the unintended consequences. And right now, I don't even know what the reports are. Eight million people now are possibly going to be in default, and scores are going up by some every month. The number keeps going up.
Adam Parks (20:28)
It's the unintended consequence was 50.4 % of subprime borrowers were in default already on the federal student loans. I remember reading a report that TransUnion put out, want to say in June. And I was petrified at looking at those numbers and trying to understand what does that mean for a greater economy. Now, if we see interest rates start to go down at all, and the value of homes, you know, and the demand for homes will skyrocket, but with all of the uncertainty,
Dan Smith (21:11)
So that is part of what we do with CDIAs, defend accurate and complete reports and making sure that the lender has the clearest picture as possible. And that's why the FCRA sort of lays out all of those terms and Congress is the one who should be making those decisions because they can look at on a nationwide, almost a global perspective and decide with all the facts whether or not certain data should be or should not.
Adam Parks (21:37)
How much more complex does it become to manage credit reporting when you've got states now getting in the mix and you can do this in this state, but you can't do that in that state.
Dan Smith (21:45)
I believe it. think eventually if it continues, it'll destroy the credit reporting system because you'll have 50 different credit reports and 50 different scores or maybe 100 different scores, depending on which model you use. And then you're going to go, OK, this state doesn't have student loans and doesn't have mortgages that were impacted by a natural disaster. And this one doesn't have medical. I don't know how you keep track of it.
I think this system becomes degraded to a point where lenders are going to look at other alternatives, I would say.
Adam Parks (22:24)
And there's limited alternatives out there because there's only so much of the data that we can collect that we can even use from a credit decisioning perspective. the more that again, I go back to the two levers, because no matter how complex or how simple we want to make things, we still have two levers, have interest rate, and we have availability of credit, and the unintended consequence of trying to help this consumer who has been stuck in let's say the loop of payday loans for a period of time.
And how do you ever get out of deficit again, if you're not able to start building a positive credit report, if you're not able to have some of those things, because as you, if you've had bad credit situations in the past, and those are on your report for a period of time, you know, there's a value to starting to pay things on time and to build that credit rate, everyone who has good credit, most likely has had some sort of credit blip in their lifetime or some sort of a
a situation or scenario in their life, but they've been able to get back to having positive credit by being consistent in their payments and having that be reported back to the system. I guess I struggle with why we don't see that at a governmental level and why we can't, why they don't see that balance between the value of the positive credit is only looking at credit as a negative instrument.
Dan Smith (23:47)
Yeah, I think it's imperative on all of us to do a better job of educating policymakers on why a fulsome, robust credit reporting system is critical to lift people up and help them not hurt them. you know, there's alternative data too, and we're supportive of including that. But the more...
clearer picture we have of a consumer, better. It doesn't have to be the traditional way only. And so we talk about rent reporting and utilities and telecom and the 1033 open banking rule and transactional data. All of those things can be tools. It's not simple and it takes a long time. But the last thing we want to do is pull back data.
We want to responsibly manage more data.
Adam Parks (24:42)
That makes a lot of sense, Dan. I like that approach, right? Responsibly manage more data and to weigh it accordingly. I know one of the arguments in the credit reporting on the medical side was in discussions with people from the CFPB saying, well, you know, it shouldn't be there. You know, we don't need it there. If it's not indicative, it shouldn't be part of the credit report. maybe it's not an indicator for one type of credit, but it is an indicator for another and
Who are they in a position to make that determination? Isn't that the position of the lender to make a decision as to how they might want to weight what's included?
Dan Smith (25:22)
There's no requirement because it's in the credit report that you use it in your underwriting. It's just a data point. And people don't understand credit scores as well either because a lender can create their own proprietary score. They take the data and do their own analysis and they overlay it and they can weigh certain things differently. If you have a debt on your
Adam Parks (25:30)
Yeah.
Dan Smith (25:47)
credit report and the lender chooses not to factor that in, that's their choice. They're the ones taking the risk, but they need that data to know it. And you know, it's such a diverse financial system and not every product is the same. So like your credit card company, that's a different risk and a risk tolerance that the lender is going to look at than a $400,000 mortgage, right?
Adam Parks (26:15)
Which come up very different interest rates too, might I add, right? Like we're talking about again that risk versus reward probability.
Dan Smith (26:19)
and turns, that's right, and collateral,
they're all different. It's not one answer. There's not one score. There's not one method, right? They all are very complex products. You've got a credit card, it's unsecured, right? But it's usually limited, comes with a higher interest rate because it's unsecured, right? So, and they can cap the dollar amount. I'm gonna give you a thousand, see how you do. Then I can raise it, right? A loan for a mortgage.
much different, right? You do have collateral on the house, but you're also giving someone $400,000 and charging right now, six, seven percent, but at times two and half percent, which was like nothing for $400,000. So it's important that that lender has confidence in their decision making. If they can't rely upon it, they're going to stop lending. They don't do it because they, you know,
Adam Parks (27:02)
Yeah.
Dan Smith (27:16)
they're forced to. They do it because it's a good business decision. And if we take away their tools from making good business decisions, they're going to stop doing it. But there is no mandate for a large bank to do mortgage loans. They can stop doing it if they can't manage the risk. They don't have to put out a credit card. There are plenty of large banks that are not consumer banks.
Dan Smith (27:43)
They've made a decision to go to the commercial side or the investment side. That's the risk you face is that the consumer side of the banking becomes harder and harder and you can not manage the risks as much and God for say it make a profit in this country, right? So, you know, they're going to look at it from that. They are in business to make money. And so if they can't, they're going to stop doing it. You see it all the time. There are certain
Dan Smith (28:11)
banks that move in and out of certain products because the regulatory burden, the liability risk, the interest rates, it all fluctuates. having that credit report and the credit system helps them manage those risks so that they can stay in those markets.
Adam Parks (28:23)
The credit scores themselves are pretty transparent as it is now I realized that different organizations may have proprietary models that are weighted differently based on those specific products that they're offering. But generally speaking, when I was significantly younger, when I was 18, it was, I'm gonna say a little bit more mysterious as to what was part of the credit score, like what what went into it. And there was all the rumors and everything else. But now the credit bureaus have literally come out and said, here's
Here's the basic weighting of a credit score. Your balance in comparison to how much you've borrowed against how much you have available to borrow. Are you paying on time? But they even break it down for you. When I log into my bank, I could see a nice little clean breakdown of my pie chart that tells me exactly how much of my credit score is being attributed to these different factors.
A lot of the mystery is gone now. We understand what it is and we understand how to improve our credit if we're a consumer at this point in time. The transparency it feels like is there now for the credit reporting system. I guess I just struggle with the lack of wanting to have transparency for the lenders as well. We've given all the transparency to the consumer and the consumer should have transparency. But how about little transparency for the...for those that are lending money.
Dan Smith (29:50)
And it's weird, you have the same politicians sometimes talking about this information should not be included on the credit report, let's say medical debt. And on the other side, they're saying, why aren't buy now pay later is included? They should include buy now pay later. It's like, it's the same argument you're making both sides of it. What's going on here? I'm so confused. Like you could sit there and watch a test, a health, you know, testimony and the same person.
Dan Smith (30:19)
a congressman's articulating why BNPL should be reported and five minutes later saying how medical shouldn't. Like it's data, it tells you a story, it helps to build out a perspective on a person, right? It's important to know that. mean, if you're getting that, that's right.
Adam Parks (30:32)
It enables the creditors to be responsible.
If you look at lending buy now pay later, for example, for Uber Eats is one thing. Is that truly responsible or not? And our inability to understand it within...
Dan Smith (30:51)
not our decision to make, right? That's the lender, but the lender knows it, right? If I use, you know, buy now pay to get my daily Starbucks delivered to my door, and I actually pay it back, okay.
Adam Parks (30:54)
Correct.
Fine. Yeah.
Dan Smith (31:06)
But if I have 20 of them and I pay half of them and I don't pay the other or I'm late, maybe they need to know that too.
Adam Parks (31:15)
behavior predictability. We circle back to the same core fundamentals of a credit system.
Dan Smith (31:18)
I still like when we talk about medical debt and when the CFPB talked about it's less predictive, which a lot of reporters like to just redefine to being not predictive. And that's not what the CFPB said at all. It said some types of debts are like medical debt is less predictive than another type of debt.
Well, of course, like a 30 day default is less predictive than a 90 day default.
Like that, right? I mean, just because it's less predictive doesn't mean it's not predictive. And so if I have a $20,000 medical debt or any debt and I have a mortgage or I'm applying for a mortgage and that debt can be foreclosed on or I could be garnished, think the lender needs to know that my income can be garnished $1,000 a month.
to pay off that $20,000 debt, and then they can make an informed decision on whether or not that person qualifies. They still make very well qualified.
Adam Parks (32:22)
But at least give the transparency to the lender so that they know what they're getting into.
Dan, you know, I really do appreciate you coming on and sharing all your insights here with me today. You've got a you've had a storied career across really financial services in general. And you've looked at things from quite a few different perspectives.
I have so many more questions to ask you and I hope I'll be able to get you back here at least one more time to continue having great conversations with me. But for today, I really do appreciate your time, attention, energy. I have learned something from every conversation I have.
Dan Smith (32:55)
Thank you. Thanks for having me. Appreciate it.
Adam Parks (32:57)
Thank you everybody for watching today. If you have any additional questions you'd to ask Dan or myself, you can leave those in the comments below on LinkedIn and YouTube and I'll be responding to those. Or if you have additional topics you'd like to see us discuss, you can leave those in the comments below as well. And I'm hoping I can get Dan back at least one more time to help me continue to create great content for a great industry. But Dan, until the next time I get to see you in person, thank you. I really do appreciate you. And thank you everybody for watching. We'll see you all again soon. Bye, everybody.
Dan Smith (33:19)
Thank you.
