A few weeks ago, the Federal Reserve Board of Governors, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration and the Office of the Comptroller of the Currency issued a joint statement acknowledging that lenders’ use of alternative data in the credit approval process will open up opportunities for consumers previously considered high risk.
Use of Alternative Data Provides Opportunities
The five agencies issued a joint statement in an effort to provide clarity about the potential risks and benefits for consumers of lenders’ use of alternative data in the credit underwriting process.
In their statement, the five agencies stated they “recognize alternative data’s potential to expand access to credit and produce benefits for consumers. To the extent firms are using or contemplating using alternative data, the agencies encourage responsible use of such data. In addition, the agencies are aware that the use of certain alternative data may present no greater risks than data traditionally used in the credit evaluation process.”
One example of relevant alternative data the agencies highlighted in their statement was the use of cash flow data derived from consumers’ bank account records. They noted that this type of data might help consumers qualify for credit who have reliable income patterns over time earned from multiple sources.
Compliance Practices will be Key
The agencies however pointed out that the use of alternative data could increase consumer protection risks in certain circumstances.
In these cases, the agencies explained that lenders would need to conduct a thorough analysis of relevant consumer protection laws and regulations to understand the compliance requirements of using alternative data in their underwriting procedures.
Based on his assessment, firms might need to implement more robust compliance systems, including “appropriate testing, monitoring and controls to ensure consumer protection risks are understood and addressed.”
The recent statement by the five US agencies on this risks and benefits to consumers of lenders using alternative data as part of the credit underwriting process reveals the growing adoption of non-traditional data sources across a wide range of businesses.
Not only are institutional investors expanding their use of alternative data as part of their investment research processes, but a wide range of businesses – both financial and non-financially oriented firms are discovering the benefits of leveraging the growing availability of alternative data to enhance their business decision-making. Clearly the use of alternative data is not likely to slow anytime soon.