CFPB seeks input on use of alternative data in credit scoring

The Consumer Financial Protection Bureau is seeking public feedback on the benefits and risks of using alternative data sources — such as bills for mobile phones and rent payments — to make lending decisions about consumers who lack sufficient history to obtain a credit score.

Traditionally, lenders use information about a borrower’s payment of debts such as mortgages, credit cards and other loans in determining who will get access to credit. However, CFPB officials said that leaves out many consumers who may not have a traditional credit history to qualify for access to credit or loans.

“Alternative data from unconventional sources may help consumers who are stuck outside the system build a credit history to access mainstream credit sources,” CFPB Director Richard Cordray said in a news release. “We want to learn more about whether this non-traditional approach can offer opportunities to millions of Americans who are credit invisible and how to minimize any risks in how this information is used.”

The bureau estimates 26 million Americans are credit invisible, meaning they have no credit history with a nationwide consumer reporting agency, and another 19 million consumers have a credit history that has gone stale or is insufficient to produce a credit score under most scoring models, the release stated. Consumers without a sufficient credit history face barriers to accessing credit, or pay more for credit, which disproportionately impacts consumers in minority or low-income communities, according to the CFPB.

Alternative data draws from sources such as bill payments for mobile phones and rent, and electronic transactions such as deposits, withdrawals or transfers, which may not turn up in a credit history, according to the release.

The CFPB inquiry specifically will focus on the following issues:

• Whether using alternative data to create or augment a credit score could increase access to credit by helping lenders better assess consumer creditworthiness.

• Whether the use of this information could make credit decisions more complex for both consumers and the industry.

• Whether the use of alternative data may help produce a faster application process, lower operating costs for lenders, and lower loan costs for borrowers.

• If there are privacy and security issues in the use of alternative data that contains sensitive personal information.

• Whether the use of alternative data could affect certain groups or behaviors in unpredictable ways, such as military families that move frequently and how the change would affect their access to credit.

The CFPB Request for Information can be found by clicking here.

By |2019-11-25T06:49:13-06:00February 20th, 2017|Financial Services|0 Comments

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