The Washington Post
By: Ylan Q. Mui
July 20, 2011
Corey Stone has seen what happens when good intentions go awry.
Five years ago, he became chief executive of a start-up called PRBC that claimed a lofty goal: to help disadvantaged Americans build their credit. He planned to use unconventional data such as rent payments and everyday bills to help them qualify for better loans. That could open the door to a new world of possibilities available almost exclusively to those with good credit -- a home, a car, even a college education.
It didn't work.
Stone's philosophy never translated into dollars. He was ousted from his position after the company sold out to a larger and troubled firm. The merger was a messy affair, and the top executive eventually landed in prison for tax fraud. And now the reams of personal data PRBC compiled are being sold into the subprime market of payday lenders and debt collectors that the company was supposed to help consumers avoid.
The rise and fall of PRBC is a case study of the growing market for our personal financial data, where the incentives for helping consumers and making profits don't always align. After failing to change the industry from the inside, Stone is now tackling it from the outside.
He joined the powerful new Consumer Financial Protection Bureau this spring as the senior official charged with overseeing the nation's credit reporting system. The agency is the centerpiece of Washington's financial reforms and will officially open for business Thursday with a mandate to level the playing field for consumers.
For Stone, that means a second chance to unravel the often conflicting interests of lenders, consumers and the warehouses of data that sit between them. Although he has never worked in government, Stone said the job was "a dream opportunity" to put his experience to use.
"I have long been interested in all of the many ways . . . that information about consumers gets used (and occasionally abused) in the markets for consumer financial services," he said in an e-mailed statement.
This article is based on interviews with former and current executives at Stone's firm or who were close to it, who spoke on the condition of anonymity to protect their jobs and relationships. Stone agreed to respond on the record to questions via e-mail. His story mirrors those of other officials at the new agency, who signed up for their jobs because they have lost confidence in the ability of the markets to police themselves.
"Sometimes the people you're talking to don't care about doing good," one of Stone's former colleagues said. "Sometimes they care about making money."
Credit scores were not created for the benefit of consumers.
Their origins date back nearly a century to general stores that allowed farmers to buy seed on credit, according to a trade group. The stores took note of who paid them back -- or, more important, who didn't -- once the harvest came in, and shared the information with other merchants.
That practice evolved into the elaborate credit reporting system in place today: Businesses share information on millions of Americans' mortgages, car notes, credit cards and student debt through three central credit bureaus. The bureaus sell the information to lenders, who rely on it to determine who is worthy of a loan. The consumer has no say in the process.
PRBC wanted to turn that model on its head. As many as 30 million Americans have limited profiles or do not show up at all in the main credit bureaus, trapping them in a costly catch-22: They need loans to build their credit history, but they can't get loans without one. Instead, they are forced to turn to a patchwork industry of payday lenders, check cashers and prepaid cards that can carry exorbitant fees and interest rates.
Many were financially responsible consumers, PRBC founder Michael Nathans believed. They just needed a way to prove it.
Nathans started the company in 2002 by asking consumers for records of their rent payments, in the hope that establishing a history of paying on time could win over mainstream lenders. He then worked with landlords and property managers to capture more tenants. In exchange, he offered them access to his growing database of renters.
Stone was an executive at a company that handled bill payments for the same group of Americans when he learned about PRBC. He signed on as chief executive in 2006 and expanded Nathans's idea by including more bill-payment information from utilities, cellphones, even prepaid cards. The more information the company collected, Stone figured, the better his chances of persuading lenders to use it.
The concept attracted seed money from investors such as the Ford Foundation and the Center for Financial Services Innovation, a think tank. Housing financiers Fannie Mae and Freddie Mac promised to test the new models as a way to underwrite mortgages.
The big break came a year later when the company landed a partnership with FICO, which develops the credit scoring formulas used by the main three credit bureaus. FICO agreed to use PRBC's data in a new formula it created specifically for untraditional consumers that was supposed to make it cheaper and easier for lenders to determine who qualified for a loan. The strength of FICO's brand name boosted PRBC's credibility in the marketplace.
But a year into the partnership, PRBC still could not persuade a major lender to use its data or the score. At every step, it seemed, its model fell short.
Former executives and people close to the company gave different reasons why: The focus on encouraging individual consumers to enroll in PRBC's database might have limited the company's scale and driven up the price of its reports. By 2008, it had amassed 3 million records, according to one former executive -- small potatoes compared with the 200 million Americans in the largest credit bureaus. The reports could not be easily folded into mainstream databases.
But they all agreed that PRBC's window closed when the real estate market began to falter. Many lenders would not touch the marginalized borrowers no matter what data might be available on them. Fannie and Freddie never released the promised guidelines for using the information PRBC had spent years collecting.
With no buyers and no money, PRBC sold itself off in 2008 to a credit processing company called Microbilt that envisioned a new opportunity taking shape.
As more people fell behind on their loans in the recession, their credit scores plunged. Many quickly found themselves locked out of a banking system they once took for granted.
That made the type of data that PRBC collected more marketable than ever, only to a different clientele: pawn shops, debt collectors, repossession firms and payday lenders -- subprime players long criticized by consumer rights groups.
Although Stone had worked with some of those businesses before, Microbilt's new management took these relationshipsone step further. They sponsored online payday lending groups and attended conferences for debt collectors and repossessors. Many of these clients bought the data solely to help them track delinquent customers, according to one of Microbilt's former salesmen.
The company also paid for a series of edgy TV ads highlighting its new clients. In one spot for a used-car dealer, TDM Auto Sales in North Carolina, the owner says that he was a gynecologist in his native Cuba. Snapping a surgical glove, he expounds on his new business philosophy as two comedians costumed in oversize mustaches toot horns.
"Do you have bad credit? Start a revolution! People with bad credit driving everywhere!" the owner shouts.
Microbilt did not respond directly to questions about its clients or its former executives, but Brian Bradley, executive vice president, said that the company complies with all government regulations and that credit scoring can help consumers access a higher standard of living.
"A lot of the success of our commerce was built on the fact that we had consumer data and businesses that shared information," he said."Whenever we get overly zealous around privacy issues . . . people should have that context of how important it has been for the prosperity of the United States."
In the merger, Stone was ousted as chief executive. Nathans lingered at the new company long enough to raise alarms about Microbilt's new clients before leaving for a think tank. Microbilt chief executive Phil Burgess, who orchestrated the deal, is in prison for tax evasion.
"There are companies that are run by kind of borderline people. They operate . . . on the fringe of legality," said a person close to Microbilt. "The credit crisis is pushing integration between those two separate worlds."
It is impossible to tell how many firms track the movements of your wallet and sell the data for a profit. There is no official registry, and the firms are not obligated to tell you where your personal financial information might wind up. But all of them are incentivized to sell their reports to as many buyers as possible -- regardless of what it means for consumers.
Still, Stone said he believes that the types of data his firm collected have the potential to help create a safe on-ramp into the mainstream banking system for the most vulnerable Americans.
"It might be a good thing if young people and others starting out in the financial world didn't feel the need to take on debts just to establish credit," Stone wrote in an e-mail. "There's some evidence that using utility, phone, and/or rental payments to show they're financially self-sufficient could help them."
The magnitude of the task before him underscores the ambitious scope of the government's new consumer watchdog. Neither Stone nor the bureau's top brass -- veteran banker Raj Date, Harvard law professor Elizabeth Warren or former Ohio attorney general Richard Cordray -- has worked at a federal agency before. Yet no other government institution has such wide latitude to stop unfair, deceptive or abusive practices among financial institutions or the mandate to rebalance broken markets.
It remains unclear how -- or even whether -- the Consumer Financial Protection Bureau will wield those new powers. The agency is trapped in a political maelstrom that has left it without a director, even though it is opening Thursday.
President Obama named Cordray as a potential candidate earlier this week, but Republicans have threatened to block his confirmation. Without a leader, the CFPB has limited authority to write new rules. That leaves Stone with an incomplete tool kit as he tries to bring order to the chaotic business of credit scoring.
What kind of information should be used to judge whether someone is worthy of a loan? What role should consumers have in determining how their financial data are used?
And, perhaps most important, how can the government help the most vulnerable Americans build credit when the industry has little incentive to help them?
These questions are the same ones that plagued Stone in his old job. The forces working against him are just as strong. And the answers continue to be elusive.