A deeper look at Section 1033: Educating borrowers about open banking

The lending industry is set for a massive leap forward in data sharing. While consumer cash flow data has long been under the control of banking institutions, regulators are moving to give people significantly more power.

Central to this shift is Section 1033 of the Dodd-Frank Act. This regulation, which the Consumer Financial Protection Bureau (CFPB) is in the process of implementing, not only mandates that financial institutions provide consumers with access to their own data, but that this information be made available to authorized third parties with the consumer’s permission.

On June 5, the CFPB issued a final rule addressing the attributes a standard-setting body must demonstrate in order to be recognized by the agency for purposes of the personal financial data rights rule. The CFPB also published a step-by-step guide  for how to apply to be a recognized standard-setting body. The CFPB plans to finalize the remainder of the proposed rule regarding personal financial data rights this fall.

Section 1033 is widely expected to lead to a rise in the sharing of consumer banking and transactional data between financial institutions and third parties, commonly referred to as open banking. This offers significant benefits for both lenders and borrowers. However, to make the most of open banking, consumers need to feel comfortable sharing their information. Getting consumers to this point requires lenders to build consumer trust. That’s why maintaining clear and transparent communication is critical to unlocking the open banking opportunity.

Benefits of open banking

Both consumers and lenders have a lot to gain from embracing open banking. The traditional lending system has failed to provide sufficient credit options for many Americans. Around a third of the U.S. population – roughly 100 million people – lack reliable access to credit.

The accelerated use of consumer-permissioned data – information that people voluntarily share – has the potential to significantly expand the credit landscape, expanding opportunity for consumers. At the same time, it can help people feel more informed about the credit application process, since lenders will be leveraging data that most Americans use to manage their finances – their daily deposit account balance – rather than the unfamiliar data used in traditional credit reports.

For lenders, integrating consumer-permissioned data into the underwriting process enables them to take a holistic underwriting approach that combines traditional credit data with real-time cash flow information, opening new customer segments and creating a more accurate and nuanced assessment of risk.

The net result of all of this is higher consumer trust, increased approvals, and greater financial inclusion. Lenders can now consider borrowers with marginal credit scores or limited credit histories who demonstrate low-risk cash flow profiles. This expanded view also allows for smarter declines, identifying potential signs of financial distress before it impacts credit reports.

Tips for communicating updated guidance

Ultimately, these benefits are dependent upon companies ensuring consumers feel comfortable sharing their data. For lenders, the first step is to understand the different borrower groups that make up their customer base and tailor communication strategies to each audience.

When lenders begin to communicate new policies or procedures, it’s important to be specific about how they differ from or expand on existing practices. This demonstrates continuity and reassures borrowers that these updates are not entirely new but part of an ongoing effort to enhance transparency.

In today’s world, data security is top of mind for consumers, so addressing concerns about safeguarding personal data is a crucial part of effective communication. Lenders should clearly articulate the risks and benefits of granting data access.

A little friction goes a long way

Reassuring borrowers about their data usage also requires that firms provide clear explanations of how data will be used. For example, lenders should specify whether the requested data will go towards loan approval, terms assignment, or existing partnerships with financial management tools such as personal finance apps.

Other items to consider include the time frame for which data will be utilized, the consequences of not providing the requested data, and the recourse if a customer changes their mind. Borrowers will want to know if their application will be declined if they choose not to opt in, or if they will need to upload additional documentation for verification. If they do decide to opt in, can they withdraw their consent later or delete their data in the future?

Providing this context at the moment of data collection and in an easily accessible format – not buried in terms and conditions or annual privacy policies – ensures that borrowers can make informed decisions.

Some may wonder whether all this communication will slow down the lending process by introducing friction. The answer is yes. But this is a feature, not a bug. By encouraging customers to take a minute to think about what they agree to and why, lenders can further build trust and avoid problems down the line.

With the implementation of Section 1033, consumers will have greater insight into their personal financial data and be empowered to share it with third parties. By clearly communicating where data is going, what it will be used for, and how it’s protected, lenders can reap the benefits of open banking while maintaining the trust and loyalty of their customers.

Nikki Cross is Senior Director of Data Science Solutions at Nova Credit.