The Fed, CFPB, FDIC, OCC, and NCUA (the Agencies) recently issued an Interagency Statement on the increasing use of alternative data in credit underwriting by financial firms and the benefits and the risks of such use.
Alternative data includes information not typically found in consumers’ credit reports nor customarily provided by consumers when applying for credit. The Agencies specifically cite cash flow data, which may include a range of metrics that examine categories of income and expenses and how a consumer has managed an account over time (e.g., residual balances), as an example of alternative data.
In the Interagency Statement, the Agencies recognize that benefits of using alternative data in credit decisions include improving the speed and accuracy of credit decisions, helping firms evaluate the creditworthiness of consumers who may not otherwise obtain credit in the mainstream credit system (such as in a “second look” program), and enabling consumers to obtain additional products and/or more favorable pricing/terms based on enhanced assessment of repayment capacity.
Although the Interagency Statement highlights the potential benefits of using alternative data to expand access to credit for consumers, the statement also cautions that alternative data and new analytical methods must be used in a manner consistent with applicable consumer protection laws such as fair lending laws, UDAAP, and FCRA.
Before a firm uses alternative data, the Agencies would expect the firm to establish and maintain a well-designed compliance management program that would provide a comprehensive analysis of relevant consumer protection laws and regulations to ensure that it understands the applicable opportunities, risks, and compliance requirements involved with such data use. Moreover, to ensure consumer protection risks are understood and addressed, a robust compliance management program would include appropriate testing, monitoring, and controls.
The Agencies invite firms to consult with appropriate regulators when planning for the use of alternative data, and also request feedback on the Interagency Statement.
The Interagency Statement follows a Request for Information issued by the CFPB in 2017 regarding the use of alternative data and modeling techniques in the credit process, which WBK previously covered here.