Use of alternative data at financial institutions, particularly with banks that have third-party relationships with financial technology (fintech) lenders, should be the focus of collaboration among federal financial institution regulators – with a focus on the federal insurer of bank deposits, according to a report issued Tuesday by the congressional watchdog.
The report indicated that written communication providing specific direction on use of alternative data is required.
The Government Accountability Office (GAO), in its report which detailed an outstanding 2018 recommendation from the agency that has not yet been addressed by the Federal Deposit Insurance Corp. (FDIC), asserted that “continued attention to this issue could improve (FDIC’s) ability to more effectively oversee risks to consumers and the safety and soundness of the U.S. banking system.”
The “priority open recommendation” sent to the FDIC by the GAO focuses on the March 2018 recommendation. That action called on the savings insurer to coordinate with other federal banking regulators and the Consumer Financial Protection Bureau (CFPB) to “communicate in writing to banks that engage in third-party relationships with fintech lenders on the appropriate use of alternative data in the underwriting process, including issues to consider when selecting types of alternative data to use.”
The GAO noted that the FDIC and the other regulators have issued an interagency statement highlighting potential benefits and risks of using alternative data and encouraged financial firms to use it.
“However, the statement does not provide firms or banks specific direction on the appropriate use of that data, including issues to consider when selecting types of alternative data to use,” GAO stated.
GAO stated that the FDIC needs to provide – with other federal banking regulators and the CFPB – “written communication that gives banks in relationships with fintech lenders specific direction on the appropriate use of alternative data in the underwriting process.”