U.S. banking regulators urge ‘responsible use’ of alternative lending data

WASHINGTON (Reuters) – U.S. banking regulators said on Tuesday that lenders must have robust compliance tools in place to ensure “responsible use” of non-traditional sources of financial data to help determine whether a potential customer is credit worthy.

In a joint statement, the country’s five chief regulators acknowledged that using consumer information originating outside of traditional sources could expand the access and affordability of credit for certain borrowers.

At the same time, the agencies warned that banks and other lenders need to ensure they have tools and policies in place to make sure the new tactics do not violate consumer protection and fair lending laws.

“The use of alternative data and analytical methods…raises questions regarding how to effectively leverage new technological developments that are consistent with applicable consumer protection laws,” the regulators said. “To the extent firms are using or contemplating using alternative data, the agencies encourage responsible use of such data.”

Lenders and regulators are looking at how data beyond a basic credit score could be used to improve underwriting practices, for example by analyzing bank accounts, utility bills, level of education and employer information.

Looking at such data might provide a different picture of a consumer with little-to-no traditional credit history or raise flags about a borrower that would otherwise be missed, lenders say.

Without a history of using such outside information, however, past attempts at incorporating alternative data have been complicated by the risk of inadvertently discriminating against borrowers or other missteps.

The regulators said in their statement new data sources could allow lenders to extend credit more quickly and offer worthy borrowers better terms, and that some alternative data sources may be no riskier than traditional ones.

For example, some firms are using cash flow data to assess a borrower’s ability to repay loans, they said. Such information typically comes from reliable sources like bank accounts, and consumers can easily grant permission to use it, they said.

The regulators also said alternative data could prove useful for “second look” programs that reassess borrowers who were originally denied credit under traditional methods.