“Alternative data” to determine credit-worthiness of consumers who lack enough credit history to obtain a credit score is the subject of an exploration opened Friday by the CFPB.
The inquiry into “alternative data” focuses on “credit invisible” consumers, according to the consumer bureau. In their case, use of “alternative data” sources such as history of payment for mobile phone usage or rent might be considered when making lending decisions, rather than traditional credit history (based on such payments as mortgages and credit card bills).
According to bureau Director Richard Cordray, the idea is to investigate whether the non-traditional approach can offer opportunity to the 26 million consumers the agency estimates are credit invisible. The agency also estimates that another 19 million consumers have a credit history that has gone stale, or is insufficient to produce a credit score under most scoring models.
“Without a sufficient credit history, consumers face barriers to accessing credit, or pay more for credit,” CFPB stated in a release. “This problem disproportionately impacts consumers who are Black or Hispanic, and people who live in low-income neighborhoods. It also impacts some recent immigrants, young people just getting started, or people who are recently widowed or divorced who don’t have enough credit history on their own.”
CFPB is also looking at how to limit risks posed by the use of alternative data. For example, aside from considering history of mobile phone and rent payments, the agency is also looking at the risks (and benefits) of tapping history of electronic transactions such as deposits, withdrawals or transfers, with the aim of discerning a track record of meeting obligations that may not turn up in a credit history.
However, CFPB conceded that alternative data may be inconsistent, incomplete, incorrect, overgeneralized, or biased. “Such flaws could adversely affect credit access for low-income and underserved populations, or others,” the agency stated.
The agency has issued a “request for information” on the entire subject area, with comments due by May 19.