Jun 06, 2017 Walt Wojciechowski
The Consumer Financial Protection Bureau recently submitted a request for information regarding how financial institutions (FIs) use alternative data in their operations.
Essentially, the CFPB is trying to play catch-up. Between millennials' aversion to traditional credit products and the availability of mature alternative credit products on the market, lenders are gravitating toward such data as a way to augment their credit assessment processes. Now, the CFPB is trying to figure out if alternative credit is truly a boon to customers.
Details of the CFPB's Request
The CFPB announcement noted that the purpose of the inquiry is to determine whether alternative credit reports create or diminish opportunities for consumers. The institution also stated that it wants to assess how alternative credit data will impact the marketplace as a whole. For example, how will alternative data impact the customer experience?
In addition to lenders, the CFPB is seeking commentary from:
- Individual consumers.
- Groups advocating for consumer, civil and/or privacy rights.
- Community development and service organizations.
- Consumer reporting agencies.
- Data brokers and aggregators.
- Data model developers and licensors.
After the CFPB gathers enough information, the institution indicated it will develop standards designed to encourage responsible use of alternative credit products, as well as assess regulations that discourage enterprises from integrating alternative credit data into their day-to-day practices.
One of the CFPB's hopes is that alternative credit data will prove its ability to help both credit invisible and unscorable individuals gain access to home loans, personal loans and other credit products. Right now, there are about 45 million Americans who either have low or thin-file credit reports, and as a result, find it difficult to obtain credit services that would help them buy homes, cars and other indicators of wealth.
However, a chief concern is that alternative credit data could also hurt such individuals. For instance, if a someone has a bad alternative credit score, that will negatively impact his or her ability to get a loan.
More Thorough Credit Assessments
Alternative credit reports, by themselves, are neither a boon nor disadvantage to customers. Some would argue that they hinder people's ability to get loans, but this is only the case when individuals have low alternative credit scores.
For example, if a consumer consistently misses utility payments, that behavior is going to reflect poorly in his alternative credit report. However, if he keeps up with utility payments, such actions will reflect positively, thus increasing his score.
Essentially, alternative credit reports aren't inherently weighed against or in favor of consumers. It's up to them. Those who pay their rent, utility bills and phone bills on time and in full have nothing to worry about. In fact, if such individuals lack traditional credit reports, the prevalence of strong, positive data in their alternative credit reports may convince loan officers to provide them with loans.
The bottom line: There is no inherent bias across alternative credit scores. They simply reflect the information of which they consist. The CFPB may come to similar conclusions following their assessment.