2 minutes
The move highlights the future of alternative data in making credit decisions.
Taking action is the hallmark of the Consumer Financial Protection Bureau, but recently it issued its first “no action” letter. No action letters are issued by some federal agencies, including the Securities and Exchange Commission, to inform an entity that agency staff will not recommend sanctions against it for particular actions.
While entity-specific and not binding on the Director, CFPB’s first no action letter is noteworthy because it reinforces the agency’s generally positive views toward the use of certain alternative data to facilitate the extension of credit to underserved consumers.
A 2015 Transunion/VerstaResearch study of 317 creditors—including credit unions, banks, finance companies and credit card lenders—concluded there is a “significant unrealized opportunity” to use “alternative data” and, consistent with how CFPB uses the term, defined it as:
any information that is not captured in a traditional credit score, or data points that are incremental to the credit bureau report, including property, tax and deed records, checking/debit account and payday lending information, among other sources.
A small group of credit union respondents to the survey already include alternative data as part of their assessment of a borrower’s ability to repay.
The CFPB letter was issued in response to an application from an online creditor that provides such consumer loans as credit card re-financings and student loans. The lender uses alternative data, along with traditional sources of information, to price and extend credit. The letter indicates the CFPB staff “has no present intent to recommend initiation of supervisory or enforcement action … with respect to the Equal Credit Opportunity Act.”
For its part, the creditor will report to CFPB “how it decides which loans to approve and how it will mitigate risk to consumers, as well as information on how its model expands access to credit for traditionally underserved populations.”
Some predict the use of alternative data will be widespread by lenders in the foreseeable future, even though there are legitimate concerns about loan production for borrowers who cannot repay their loans. Yet including alternative data in an overall review process consistent with sound underwriting principles may mean some creditworthy borrowers have greater access to credit—a goal credit unions work hard to achieve.
Whether alternative data is used more broadly in the lending review process and how quickly depends largely on how CFPB proceeds. The agency continues to review comments in response to its request for information on this topic that were due in May. In June, CFPB Director Richard Cordray told its Consumer Advisory Board that the agency “will have more to say before long.”
Such issues as the application of fair lending, privacy, unfair, deceptive, or abusive acts and practices, and other requirements and concerns must be addressed, but avoiding the temptation to impose heavy rules and working with all stakeholders will be key.
Broader use of alternative data could be important for certain borrowers, lenders and communities. This will not happen if, in addressing numerous legal concerns to protect consumers from unscrupulous lenders, member-driven credit unions are not given the latitude they need to determine whether and how to use alternative data in their underwriting processes.
Mary Mitchell Dunnis a partner with CU Counsel, PLLC, Washington, D.C.
Access the agency’s press release on the letter and other related CFPB resources here.
