United States: CFPB Calls for Comment on Alternative Data

The Consumer Financial Protection Bureau ("CFPB") announced a Request for Information ("RFI") about alternative data on February 16, 2017, seeking insights into the benefits and risks of using unconventional financial data in assessing a consumer's creditworthiness. On the same day, the CFPB held a hearing in Charleston, West Virginia, inviting consumer groups, industry representatives, and others to comment on the use of alternative data.

The CFPB estimates that 45 million Americans have difficulty getting a loan under traditional underwriting criteria, because they do not have a sufficient credit history. According to the CFPB, the use of alternative data may support those Americans' creditworthiness and allow them better access to financing at more affordable rates. Alternative data includes sources such as timely payment of rent, utilities, or medical bills, as well as bank deposit records, and even internet searches or social media information—data that credit bureaus do not traditionally consider. However, a consumer who lacks a credit history but who makes timely rent and utility payments may be as likely to repay a loan as another consumer with a higher credit score.

CFPB Director Richard Cordray characterized the use of alternative data as innovative and offering a potential way to expand credit access for consumers who currently do not qualify under the conventional credit system. However, Cordray also stated that "the risks of alternative data may give rise to the potential for discrimination." The CFPB issued the RFI to examine "the pros and cons of the use of these unconventional sources of information." Specifically, the CFPB seeks information about (1) whether the use of alternative data would actually increase access to credit by improving lenders' assessment of consumer creditworthiness; (2) to what extent the use of alternative data would make credit decisions more complex for consumers and the financial services industry; (3) what impact the use of alternative data would have on costs and services; (4) what implications the use of alternative data would have on privacy and security concerns; and (5) how the use of alternative data might affect certain groups, particularly protected classes.

Panelists at the field hearing echoed Cordray's cautious optimism concerning the use of alternative data in credit decisions. Generally, the representatives of consumer groups viewed alternative data as potentially supporting expanded credit access, but emphasized the need to analyze what they viewed as the accompanying risks. One panelist asserted that the CFPB should consider fairness issues in addition to whether a factor is empirically sound, for example. Another panelist argued that those using alternative data should differentiate among the various types:  monthly rent information may be a better predictor of creditworthiness than utility bill data, because payment obligations fluctuate based on weather, and low-income consumers may struggle to pay during months of higher use.

Industry representatives on the panel generally valued the additional information that alternative data would provide, but emphasized that data must be accurate and verifiable. One panelist explained that because past performance is a good indicator of future behavior, the increased information about how consumers handle their personal finances would benefit lenders. Furthermore, alternative data may not only be useful in making credit determinations, according to one panelist, but might also assist in fraud and identity protection. A panelist from a fintech company discussed how small business lending has used alternative data to provide loans to traditionally underserved markets, and encouraged consumer lenders to engage with their customers similarly in the lending process. Another panelist from a credit bureau commented that some institutions already maintain voluntary databases of alternative data, but that a lender using such information must be careful to comply with the Fair Credit Reporting Act.

The RFI provides interested parties with an opportunity to weigh in on this rapidly evolving issue. Comments are due to the CFPB on May 19, 2017.

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