CFPB Looking to Alternative Data to Help Unbanked


Image: Bloomberg News

The Consumer Financial Protection Bureau is seeking feedback on the benefits and risks of using alternative data sources, such as rent or utility payments, that would allow lenders to build a credit history for unbanked consumers.

The bureau plans to hold a public field hearing Thursday in Charleston, W.Va., during which consumer advocates and industry representatives will discuss the impact of using unconventional sources of information.

Alternative data could be used to establish a track record and payment history for unbanked and underbanked consumers that tend to skew low-income and minority. An estimated 45 million consumers face barriers to accessing credit, or pay more for it, because they have no credit history, the bureau said.

“We want to learn more about whether this kind of alternative data could open up greater access to credit for many Americans who are currently stranded outside the mainstream credit system,” CFPB Director Richard Cordray said in prepared remarks for the hearing.

The push for using alternative data comes amid a clampdown on payday loans, cash remittances, prepaid cards and other products.

To get a loan, a consumer must have a credit score, which is created by one of the three major credit bureaus built on mountains of data culled primarily from credit card purchases. Rent is omitted from credit files because rents are collected “by millions of landlords scattered all over the country, and data on those payments is not collected in any systematic way,” Cordray said.

By contrast, debt collectors often report data on the debts they are collecting, such as unpaid medical bills, even though the actual medical providers typically do not report such information to the credit bureaus.

As a result, credit files may contain information on bills a consumer failed to pay, but not information such as rent that the consumer did pay, Cordray said.

The CFPB has estimated that 26 million Americans are “credit invisible,” meaning they have no credit history with any of the three major credit bureaus. Another 19 million consumers have a credit history that is stale or incomplete and does not generate a traditional credit score, the CFPB said.

“Unfortunately, for many consumers with a limited or nonexistent credit history, a credit score is out of reach,” Cordray said in the prepared remarks. “People with little or no credit history, or who lack a credit score, have fewer opportunities to borrow money in order to build a future and any credit that is available usually costs more.”

The CFPB also is exploring the risks posed by alternative data, including incomplete, incorrect or biased data that can adversely affect credit access for low-income and underserved populations.

The bureau is also examining whether alternative data would make credit decisions more complex for both consumers and the industry. The request for information will look at the impact of using alternative data, including whether it could lower loan costs for borrowers and operating costs for lenders.

The CFPB said it also is trying to determine if alternative data could affect some groups or behaviors. It cited an example of members of the military moving frequently, which may give the false impression of personal instability that might affect whether they can obtain a loan.

The agency is also studying the impact on fair lending if the alternative data being used can be correlated to a person’s race, ethnicity or gender, and how such risks could be managed.

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