On December 3, 2019, the five federal banking agencies1 issued a joint statement (the “Joint Statement”) regarding the use of alternative data for credit underwriting. The Agencies highlighted potential benefits that may arise from the use of alternative data, including the ability to make faster and more accurate credit determinations and the potential to provide credit at a lower rate or to individuals or small businesses that would otherwise be unable to access it. While the Agencies issued approving language regarding the use of certain types of alternative data, they also cautioned that the use of alternative data may have consumer protection implications, including fair lending, prohibitions against unfair, deceptive or abuse acts or practices and the Fair Credit Reporting Act.
The Joint Statement provides that a robust compliance management system is necessary in order to develop, implement and monitor the use of alternative data for underwriting. Although it states that certain types of alterative data may present greater compliance concerns than others, it highlights the use of a cash flow analysis as a potentially valuable source of alternative information for underwriting purposes. Moreover, the discussion of cash flow analysis provides some indication of factors the Agencies may consider in determining the compliance risk related to various types of alternative data. These factors may include:
- whether there is a clear connection between the data and the borrower’s creditworthiness;
- whether the data is individual to the borrower;
- whether the data can be obtained from a reliable source to ensure accuracy;
- whether the borrower controls access to data by, for example, providing express permission for the creditor to be provided access to the data; and
- whether use of the data can be disclosed and explained to the borrower as may be required under the Equal Credit Opportunity Act and the Fair Credit Reporting Act.
While the Joint Statement does not specifically enumerate these factors separately from the discussion of the merits of cash flow analysis or indicate that any one of them would be required with respect to use of alternative data, the Joint Statement does suggest that consideration of these factors will be useful to creditors in implementing and maintaining an appropriate compliance management system. As traditional lenders and financial technology companies continue to explore innovative underwriting criteria, they should remain cognizant of the Agencies’ tepid endorsement of the use of certain types of alterative data, as well as the compliance risks that may be implicated.
1 The Joint Statement was issued by the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency (collectively, the “Agencies”).