As regulators continue to hone in on the use of alternative data and artificial intelligence in consumer financial decisions in 2019, five federal financial regulators ended the year with an “Interagency Statement on the Use of Alternative Data in Credit Underwriting,” recognizing the risks and benefits of such data use. In that statement, the Federal Reserve Board, CFPB, OCC, NCUA and FDIC acknowledged that they were “aware” of the use of “a broad range of alternative data,” by banks and non-bank firms, in an array of financial activity, including underwriting, fraud detection, marketing, pricing, servicing and account management. The statement itself focused on the risks and benefits of analyzing alternative data sources in credit underwriting decisions.
Part of the statement recognized the benefits of using alternative data in credit decisions, as some of the regulators had previously done. It acknowledged that the “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.” The statement’s principle example of how such data can expand credit access was the automated use of “cash flow data to better evaluate borrowers’ ability to repay loans,” underscoring that such data “are specific to the borrower and generally derived from reliable sources, such as bank account records, which may help ensure the data’s accuracy.” The regulators also emphasized that consumers can expressly allow access to cash flow data ensuring consumer “control over the data.” The fact that the statement highlighted these features may provide a hint that regulators may view these characteristics of using alternative data (reliability, accuracy, control) as relevant to determining whether particular activity enhances credit access. (The statement also acknowledged the benefits using alternative data in “Second Look” programs for applicants who would otherwise be denied credit.)
The statement also highlighted the potential risks of using alternative data and the need for compliance monitoring. Specifically, the regulators called out potential concerns that using “alternative data and analytical methods” could raise questions under consumer protection laws, such as fair lending laws, UDAAP and the FCRA. The regulators emphasized the need for companies to have compliance management programs that provide for a “thorough analysis of consumer protections laws and regulations,” including undertaking “appropriate testing, monitoring and controls to ensure consumer protection risks are understood and addressed.”
Needless to say, as developments in this area continue, it will be important for industry participants to keep abreast of the latest regulator guidance and enforcement activity.