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12.05.2019 | Legal Update

On December 3, 2019, the Board of Governors of the Federal Reserve System, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and National Credit Union Administration (collectively, the “Agencies”) issued an Interagency Statement that is generally supportive of the use of alternative data in credit underwriting by banks, credit unions, and non-bank financial firms.

Alternative data includes information not typically found in consumers’ traditional credit reports or customarily provided by consumers when applying for credit. It often includes cash flow data derived from consumers’ bank account records that examines categories of income and expenses (e.g., wages, rent, utility, cell phone, and other regular debits and credits), as well as educational and occupational information, social media use, and other online or mobile activities. According to the Agencies, alternative data may “improve the speed and accuracy of credit decisions and may help firms evaluate the creditworthiness of consumers” and “enable consumers to obtain additional products and/or more favorable pricing/terms based on enhanced assessments of repayment capacity.”

The Interagency Statement highlights the potential financial inclusion benefits of using alternative data in credit underwriting by expanding access to credit and capital to consumers and small businesses. However, the Interagency Statement also cautions that the use of alternative data and analytical methods raises questions about how to effectively leverage new technological developments that are consistent with applicable consumer protection laws such as fair lending laws, prohibitions against unfair, deceptive, or abusive acts or practices, and the Fair Credit Reporting Act. Banks, credit unions, and non-bank financial firms are also advised to apply the federal banking agencies’ model risk management guidance, which contains principles for managing risk related to models, including those that may leverage alternative data. Finally, the Interagency Statement describes the components of a well-designed compliance management program which should include, among others, appropriate testing, monitoring, and controls to ensure consumer protections risks are understood and addressed.

Although the Interagency Statement highlights the potential consumer protection issues from a lending standpoint, it does not, however, highlight the potential data protection and related privacy issues that arise with the aggregation, use, and sharing of alternative data across platforms. As detailed in the Treasury Department’s July 2019 Report on financial technology and financial innovation, the Agencies should support the Treasury Department’s recommendation that consumers should have the right to permission their own financial data for third-party use.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.