While alternative data is helpful for financial technology, or “fintech,” companies to use in determining borrowers’ creditworthiness, the Consumer Financial Protection Bureau and the federal banking agencies should communicate with these lenders about how to use the data, according to a report issued by the congressional watchdog Wednesday.
In its report Financial Technology: Agencies Should Provide Clarification on Lenders’ Use of Alternative Data, the Government Accountability Office (GAO) said use of alternative data – such as supplementing traditional data (credit scores, for example) with information about a borrower’s college degree – may make loans available to more people. However, the congressional watchdog pointed out, use of such data could also have unintended effects.
“GAO recommends that BCFP (now known, again, as the CFPB) and the federal banking regulators communicate in writing to fintech lenders and banks that partner with fintech lenders, respectively, on the appropriate use of alternative data in the underwriting process,” GAO wrote in its report. GAO also noted that the agencies each stated that they plan to take action to address GAO’s recommendations.
The report notes that both the consumer bureau and the banking regulators have monitored fintech lenders’ use of alternative data by collecting information and developing reports on alternative data. “But they have not provided lenders and banks with specific guidance on using the data in underwriting,” GAO wrote.
For example, GAO pointed to the bureau’s fair-lending examination procedures and the banking regulators’ third-party guidance on risk. GAO said neither clearly communicates the agencies’ views on the appropriate use of alternative data.
“Nine of the 11 fintech lenders GAO interviewed said additional guidance would be helpful to clarify regulatory uncertainty, which some lenders identified as a barrier to further financial innovation in expanding access to credit,” GAO said. “Further, federally regulated banks that have partnered with fintech lenders told GAO that clarification on appropriate use of alternative data would help them manage their relationships with those lenders.”
The report added that federal internal control standards state that agencies should externally communicate the necessary quality information to achieve their objectives. “With clear communication from BCFP and the federal banking regulators on appropriate use of alternative data in the underwriting process, fintech lenders would have greater certainty about their compliance with fair lending and other consumer protection laws, and federally regulated banks may be better able to manage the risks associated with partnering with fintech lenders that use these data,” GAO wrote.