CFPB Issues Request for Information Regarding the Use of Alternative Data in Credit Decisions
February 21, 2017
The Consumer Financial Protection Bureau (CFPB) has issued a Request for Information (FRI) regarding the benefits and risks from using alternative data sources in making lending decisions about consumers who might be credit invisible.
Credit invisible consumers are those who have no, or very limited, credit history with a nationwide consumer reporting agency.
For some consumers, the use of unconventional sources of information, called “alternative data,” may be a way to gain access to credit to build a credit history. Alternative data draws from sources such as bill payments for mobile phones and rent, and electronic transactions such as deposits, withdrawals or transfers. This information could show a track record of meeting obligations that may not turn up in a credit history. As a result, some who now cannot get reasonably priced credit may see more access or lower borrowing costs.
The CFPB is also exploring risks posed by alternative data that is inconsistent, incomplete, incorrect, overgeneralized, or biased. Such flaws could adversely affect credit access for low-income and underserved populations, or others. The CFPB’s Request for Information seeks insights into the benefits and risks of alternative data and the techniques used to compile and analyze it. Specifically, Bureau will explore topics including:
Access to credit
The CFPB seeks information about whether using alternative data to create or augment a credit score could increase access to credit by helping lenders better assess consumer creditworthiness. For instance, a consumer without a scored credit history may still pay bills on time for utilities or mobile phones. This might reassure lenders that they are viable credit risk. Some lenders might not lend to a consumer with a credit score less than 620. However, they might do so if alternative data suggests they are less of a risk for defaulting on the loan.
Complexity of the process
The CFPB is looking at whether the use of this information could make credit decisions more complex for both consumers and industry. This process includes lenders who must notify consumers about credit decisions and financial educators helping consumers grasp their credit standing. The Bureau is examining whether the added complexity makes it harder for consumers to understand and take control of their financial lives.
Impact on costs and service
The CFPB is looking into the impact of the use of alternative data, new ways to analyze it, and new technologies on costs and services in credit decisions. The Bureau is studying if this may help produce a faster application process, lower operating costs for lenders, and lower loan costs for borrowers.
Implications for privacy and security
The CFPB is looking into privacy and security issues in the use of alternative data that contains sensitive personal information. Consumers may not know that it has been collected and shared or how it will be used in the credit process. The Bureau will also explore whether some data are more prone to errors because of weaker or different standards than data traditionally used in credit decisions, and whether consumers can correct errors in this information.
Impact on specific groups
The CFPB is looking into whether the use of alternative data could affect certain groups or behaviors in unpredictable ways. For example, members of the military may frequently move, which might give a false impression of personal instability that would affect whether they can get credit. The Bureau is also studying the impact on fair lending of using data that may be correlated to a person’s race, ethnicity, gender, or other attribute, and how such risks could be managed.
National Credit Union Administration (NCUA)
The NCUA announced that its first round of CDFI certification application is now open.
NCUA announced that its four permanent funds earned clear audit opinions for 2016.
Consumer Financial Protection Bureau (CFPB)
The CFPB announced that it is seeking public feedback on credit access for consumers that lack credit history, known as the credit invisible.
Director Cordray delivered prepared remarks at the Alternative Data Field Hearing. Cordray described how alternative data could help consumers that do not have credit scores.
Director Cordray delivered prepared remarks at the Financial Literacy and Education meeting.
Federal Reserve Board (FRB)
The February issue of FedFlash is now available.
Federal Trade Commission (FTC)
The FTC delivered a summary of its 2016 work to the CFPB detailing its efforts to stop unlawful debt collection practices.
Federal Deposit Insurance Corporation (FDIC)
The FDIC will be holding a Money Smart Train the Trainer webinar on February 22, 2017 at 1 p.m. EST.
Office of Foreign Assets Control (OFAC)
OFAC has updated the SDN list as of February 16, 2017. The last update prior to this was February 13, 2017.
Compliance Question of the Week
Does a court-appointed guardian have access to a person’s safe deposit box?
In Washington, after the credit union is satisfied with the guardian’s identity and authority as a guardian (e.g., Letter of Guardianship), statute allows the guardian access to the safe deposit box. Remember that a guardian is appointed to safeguard the assets of another person who has been deemed by the court to be incapacitated. In order to accomplish these duties, the guardian is allowed access to an already opened safe deposit box, as well as opening a box when necessary.
In Oregon and Idaho, the power would be granted to a conservator or a guardian if a conservator has not been appointed.