GAO reminds Fed of alternative data use, stress test modeling/risk recommendations from four years ago

Communicating the appropriate use of alternative data in the underwriting process with banks that engage in third-party relationships with fintech lenders is one of three recommendations from the congressional watchdog that the Federal Reserve that has not yet addressed, the oversight agency told the central bank Friday.

In a report of “priority open recommendations” to the Fed, the Government Accountability Office (GAO) said the three recommendations to the central bank should be given “high priority.”

In a letter to Fed Board Chair Jerome Powell from GAO Comptroller General Gene L. Dodaro the watchdog agency said that in December 2018 GAO said the Fed, the other two federal banking regulators and the Consumer Financial Protection Bureau (CFPB), needed to communicate the use of alternative data in the underwriting process to be better able to “manage the risks associated with partnering with fintech lenders that use these data.”

The other two recommendations made by GAO, the agency reminded, were that the Fed “needed to improve its ability to manage model risk and stress testing of banking institutions.” The Fed said the improvements included designing and implementing a process to communicate information about the uncertainty surrounding post-stress capital ratio estimates during capital analysis and review deliberations.

The recommendations, the GAO said, also included implementing a process to articulate tolerance levels for key risks identified through sensitivity testing and for the degree of uncertainty in the projected capital ratios.

“Implementing the two recommendations in this area could help the Federal Reserve manage the risks in its models and account appropriately for uncertainty and sensitivity of model results,” the GAO said in a letter to.

GAO Priority Open Recommendations: Board of Governors of the Federal Reserve System

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