The federal banking regulators and the CFPB recently issued an “Interagency Statement on the Use of Alternative Data in Credit Underwriting,” stating in sum that the agencies “encourage responsible use” of alternative data, especially in the context of credit underwriting.
A copy of the Interagency Statement is available at: Link to Interagency Statement.
As you may recall, the CFPB previously addressed “alternative data” in February of 2017. In the CFPB’s prior publication, and in this Interagency Statement, “alternative data” refers to “information not typically found in the consumer’s credit files of the nationwide consumer reporting agencies or customarily provided by consumers as part of applications for credit.”
For example, “alternative data” would include the automated use of “cash flow data to better evaluate borrowers’ ability to repay loans.” This data is usually verified by bank account or similar records, and can “demonstrate reliable income patterns over time from a variety of sources rather than a single job.”
The Consumer Financial Protection Bureau, together with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency, noted that many of their regulated entities “are either using or contemplating” using a “broad range of alternative data” for purposes of “credit underwriting, as well as in fraud detection, marketing, pricing, servicing, and account management.”
In encouraging the “responsible” use of alternative data, the federal agencies note that:
- Entities using this data must comply with “applicable consumer protection laws, [such as] fair lending laws, prohibitions against unfair, deceptive, or abusive acts or practices, and the Fair Credit Reporting Act.”
- Entities should conduct “thorough analysis of relevant consumer protection laws and regulations to ensure firms understand the opportunities, risks and compliance requirements before using alternative data,” and that “data that present greater consumer protection risks warrant” additional “appropriate testing, monitoring and controls to ensure consumer protection risks are understood and addressed.”
- Depository institutions should “ensure that alternative data usage comports with safe and sound operations,” including “rigorous assessment of the quality and suitability of data to support prudent banking operations.”
- Depository institutions should also look to “the federal banking agencies’ model risk management guidance [which] contains principles for managing risk related to models, including those that may leverage alternative data.”