Compliance: Using alternative data in underwriting
Five federal financial regulators, including NCUA, released a joint statement on the use of alternative data in underwriting by credit unions and other financial institutions. The statement notes the benefits that using alternative data may provide to consumers, such as expanding access to credit and enabling consumers to obtain additional products and more favorable pricing and terms.
It also explains that a well-designed compliance management program provides for a thorough analysis of relevant consumer protection laws and regulations to ensure firms understand the opportunities, risks, and compliance requirements before using alternative data.
Alternative data includes information not typically found in consumers’ credit reports or customarily provided by consumers when applying for credit. Alternative data include cash flow data derived from consumers’ bank account records.
The agencies recognize that use of alternative data in a manner consistent with applicable consumer protection laws may improve the speed and accuracy of credit decisions and may help firms evaluate the creditworthiness of consumers who currently may not obtain credit in the mainstream credit system.
According to the agencies, they may offer further information on the appropriate use of alternative data as the agencies gain a deeper understanding of how it is used.