On April 25, the Consumer Financial Protection Bureau held its Spring 2017 Community Bank Advisory Council meeting in Washington. The purpose of the meeting was to allow representatives from community banks an opportunity to provide additional input on the Bureau’s Request for Information (“RFI”) on the use of alternative data to assess creditworthiness of consumers applying for credit. The Bureau also solicited input regarding consumer access to financial records from community bankers at the meeting.
The meeting follows the CFPB’s recent RFI to obtain feedback from stakeholders about the potential benefits and risks of using, applying, and analyzing unconventional sources of information to assess consumers’ creditworthiness. For years, banks have used data maintained by the national credit reporting agencies (“CRAs”) to determine a consumer’s creditworthiness. The problem, according to the Bureau, is that 26 million Americans are considered “credit invisible,” meaning that they have no credit history at all. Another 19 million people have credit histories that, under most models, are too limited or have been inactive for too long to generate a reliable credit score. This means that 45 million Americans are unable to access low-cost credit, according to the Bureau.
In recent years, lenders and fintech companies have increasingly looked to use alternative forms of data and newer methods of analyzing that data to assess an applicant’s creditworthiness. According to the CFPB, such innovations could expand access to credit, especially for people with thin credit histories. At the same time, the Bureau is worried that there may be risks and unintended consequences that come with using alternative data to assess creditworthiness.
The April 25 meeting offered the CFPB the chance to solicit comments from community banks as to the pros and cons of using alternative data. At the outset of the meeting, the Bureau asked:
- Will the use of alternative data to create or augment individual credit scores increase access to credit for consumers by helping lenders better assess their creditworthiness?
- Will this practice lead to more complex lending decisions for both industry and consumers, and what risks would that pose?
- How might the use of alternative data, new modes of analysis, and new technologies affect costs and services in the making of credit decisions?
- What forms of alternative data might be prone to errors, and how hard will it be for consumers to identify such errors and get them corrected?
- How may the use of alternative data affect certain groups in ways that might run afoul of fair lending laws or create other risks for vulnerable consumers?
Although the CFPB provided the community bankers with an overview of the RFI, the CFPB did not signal what future regulations may look like. Instead, the CFPB listened to the concerns and opinions of community bankers. The CFPB still appears to be trying to define what constitutes alternative data. The CFPB has identified several possible sources of alternative data (including cell phone, utility, and banking account transactions), but it was clear that the CFPB is not entirely confident that it has captured everything that might be considered a source of alternative data. Thus, the CFPB is interested in examining how lenders are using any data that would not be considered as part of a traditional credit report.
For their part, the community bankers in attendance largely supported the use of alternative data to assess creditworthiness as a means of providing credit to individuals who are considered “credit invisible.” The general consensus indicated that alternative data (such as social accountability, long-standing customer or personal relationship, and trust) had been used for generations by community banks until fair lending laws limited their ability to use these factors as a basis for their lending decisions. The community bankers seemed to agree that there is a fluid nature to alternative data such that what may be particularly relevant to one consumer (such as familial accountability) may have no bearing on another consumer. That same consumer may be a good lending risk for another reason (such as demonstrated ability to remain current with their utility bills).
The community bankers cautioned the CFPB to avoid implementing burdensome regulations that might either restrict or prescribe such practices.
Troutman Sanders will continue to monitor the CFPB’s actions as they relate to the use of alternative data.