Alternative Data in Credit Underwriting
The Federal Reserve, CFPB, FDIC, NCUA, and OCC released an Interagency Statement on the Use of Alternative Data in Credit Underwriting. The statement focuses on the consumer protection implications of the use of alternative data (information not typically found in a credit report) in underwriting, while highlighting potential benefits and risks associated. One method of alternative data included in the Statement is the use of cash flow data to better evaluate borrowers’ ability to repay loans.
Regulators state that they “recognize that use of alternative data may improve the speed and accuracy of credit decisions and may help firms evaluate the creditworthiness of consumers who currently may not obtain credit in the mainstream credit system.”
Institutions should have well designed compliance management programs provide for a thorough analysis of relevant consumer protection laws and regulation to ensure firms understand the opportunities, risks and compliance requirements before using alternative data. Applicable consumer protection laws that may apply to alternative data include: fair lending laws, prohibitions against unfair, deceptive, or abusive acts or practices, and the Fair Credit Reporting Act. Alternative data that presents greater consumer protection risks warrant more robust compliance management. This includes appropriate testing, monitoring, and controls to ensure that consumer protection risks are understood and addressed.
Using alternative data is an emerging trend, and as the agencies gain more understanding of alternative data usage, they may provide further information.
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