Bad Credit? Alternative Data Wins Support as a Way to Ease Lending
December 03 2019 - 8:21PM
Dow Jones News
By Yuka Hayashi
WASHINGTON -- Consumers with spotty or no credit histories might
find it easier to get loans after federal banking regulators
endorsed alternatives to traditional methods of assessing
creditworthiness.
The regulators on Tuesday backed the use of information such as
borrowers' cash flow as an alternative to the traditional
credit-evaluation system, which relies on scores issued by
companies such as Equifax Inc. and Experian PLC based on
applicants' past history of borrowing and repayments.
Alternative data "may help firms evaluate the creditworthiness
of consumers who currently may not obtain credit in the mainstream
credit system," the regulators said in a written statement. "To the
extent firms are using or contemplating using alternative data, the
agencies encourage responsible use of such data," the regulators
added.
An estimated 45 million to 60 million consumers lack the credit
history needed to generate reliable credit scores under the current
system, and millions more don't have access to affordable credit
because of low scores, according to FinRegLab, a nonprofit research
organization. The problem is particularly acute for people with low
incomes.
In a study this year, the group concluded that data on incomes
and spending is one of the most promising ways to improve access to
credit. It said more than 96% of U.S. households have bank or
prepaid accounts, and their current account information is now
easily accessed electronically. The study looked at lending data
from fintech firms that already use alternative data in making
lending decisions, including Accion International, Kabbage Inc.,
LendUp Global Inc. and Petal Card Inc.
"It's helpful to have the agencies weigh in," said Kelly
Cochran, deputy director of FinRegLab. "It's particularly useful
for banks, but also nonbanks, who have been thinking about these
data."
Lawmakers introduced several bills this year to improve the
credit-scoring system and held hearings to discuss the use of
alternative data. The Government Accountability Office has urged
regulators to clarify their stance on the use of alternative data
to help fintech firms comply with fair-lending laws and help banks
better manage potential risks stemming from working with fintech
companies.
The use of alternative data and analytical methods has raised
questions about fairness and the risk of lending discrimination.
For example, some lenders use people's occupational history and
educational background as factors in loan evaluation, saying that
they are strong predictors of repayments.
Consumer advocates say such data discriminate against many
people and would only enhance income inequality and the gap between
those with and without access to inexpensive credit. Some lenders
have been criticized for their attempts to use data gleaned from
social media.
In their statement Tuesday, the regulators, including the
Federal Reserve and the Consumer Finance Protection Bureau, said
lenders using such data must take steps to ensure that
consumer-protection risks "are understood and addressed."
Write to Yuka Hayashi at yuka.hayashi@wsj.com
(END) Dow Jones Newswires
December 03, 2019 20:06 ET (01:06 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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