A joint statement issued by the banking regulatory agencies addresses the use of alternative data in underwriting by banks, credit unions, and non-bank financial firms.
Five federal regulatory agencies—Federal Reserve Board, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and National Credit Union Administration—issued an interagency statement on the use of alternative data in credit underwriting, which was developed in response to a recommendation by the Government Accountability Office. The statement applies to all national banks and federal savings associations that use alternative data in credit underwriting. According to the statement, "to the extent firms are using or contemplating using alternative data, the agencies encourage responsible use of such data."
Alternative data include information not typically found in consumers’ credit reports or customarily provided by consumers when applying for credit, including cash flow data derived from consumers’ bank account records. In addition to underwriting, banks use alternative data in fraud detection, marketing, pricing, servicing, and account management. The statement focuses on the consumer protection implications of the use of alternative data in underwriting, highlighting potential benefits and risks.
The agencies recognize that use of alternative data in a manner consistent with applicable consumer protection laws may improve the speed and accuracy of credit decisions and may help firms evaluate the creditworthiness of consumers who currently may not obtain credit in the mainstream credit system. Additionally, the statement seeks to do the following:
- encourage the responsible use of alternative data;
- explain that many factors associated with using alternative data, including cash flow data, may increase or decrease consumer protection risks; and
- explain that a well-designed compliance management program provides for a thorough analysis of relevant consumer protection laws and regulations to ensure firms understand the opportunities, risks, and compliance requirements before using alternative data.
Benefits of alternative data. The agencies’ statement notes the benefits that using alternative data may provide to consumers, such as expanding access to credit and enabling consumers to obtain additional products and more favorable pricing and terms.
According to the statement, the use of alternative data may improve the speed and accuracy of credit decisions and may help firms evaluate the creditworthiness of consumers who currently may not obtain credit in the mainstream credit system. Using alternative data may also enable consumers to obtain additional products and/or more favorable pricing/terms based on enhanced assessments of repayment capacity. These innovations reflect the continuing evolution of automated underwriting and credit score modeling.
The statement addresses questions regarding how to leverage new technological developments that are consistent with applicable consumer protection laws, including fair lending laws, prohibitions against unfair, deceptive, or abusive acts or practices, and the Fair Credit Reporting Act. According to the statement, many factors associated with the use of alternative data, including those for cash flow data, may increase or decrease consumer protection risks. The agencies also stressed the importance of a well-designed compliance management program since data that present greater consumer protection risks warrant more robust compliance management.
MainStory: TopStory BankingOperations ConsumerCredit FairCreditReporting
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