On December 3, 2019, the Federal Reserve Board, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and National Credit Union Administration (collectively, “the agencies”), released a joint statement on the use of alternative data in underwriting by banks, credit unions, and non-bank financial firms. The agencies defined alternative data as 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.”
The agencies recognized that the use of alternative data could improve the speed and accuracy of credit decisions and expand access to credit for consumers who currently cannot obtain credit in the mainstream system. They also acknowledged that such data could allow consumers to obtain additional products and/or more favorable pricing or terms. They highlighted the positive impact that this could have on the growth of small businesses.
At the same time, the agencies cautioned that the use of alternative data must comply with applicable consumer protection laws, including fair lending laws, prohibitions against unfair, deceptive, or abusive acts or practices, and the Fair Credit Reporting Act. The federal banking agencies also cautioned that banks using alternative data should employ appropriate data controls to ensure safe and sound banking operations and follow the principles outlined in the model risk management guidance when using models that leverage alternative data. Furthermore, firms must implement well-designed compliance management programs, particularly for data that presents greater consumer protection risks.
The agencies pointed to automated cash flow data as a promising form of alternative data akin to the traditional evaluation of a borrower’s income and expense activity over time. They indicated that cash flow data are more likely to be accurate because the data are specific to the borrower and are typically derived from reliable sources, such as bank accounts. The agencies noted that consumers’ ability to expressly give permission to access such data enhances transparency and consumer control over such data. The agencies also favorably mentioned the use of alternative data in “Second Look” Programs applied to applicants who would otherwise be denied under traditional underwriting standards.
The agencies invited firms to consult with appropriate regulators when planning for the use of alternative data. Although the Interagency Statement did not address the use of alternative data in artificial intelligence and machine learning models, the agencies said that they may offer further information on the appropriate use of alternative data as they learn more.