ABA Expresses Concern about Using Alternative Data for Credit Scoring

Banks are generally open to the idea of using alternative data sources — such as mobile phone bills and rent payments — to help consumers establish a credit history, but concerns about compliance, data integrity and other risks stand in the way, the American Bankers Association said today in a comment letter to the Consumer Financial Protection Bureau. The comments came after the bureau announced recently that it is in the process of exploring whether and how alternative data sources could be used to effectively assess creditworthiness.

ABA noted that using alternative data could potentially expand access to financial services to consumers with low credit scores, but that banks are hesitant to incorporate alternative data sources in the underwriting process due to concerns over fair lending, UDAAP, model validation challenges and cost, among other things. “In short, there are questions about whether the compliance risks and costs, coupled with the uncertain predictability of alternative data, justify the potential return and benefits,” the letter said.

As the CFPB continues to pursue the use of alternative data sources, ABA encouraged the bureau to reconsider how it enforces fair lending and UDAAP laws and seek to resolve existing uncertainties about regulatory and legal expectations. The CFPB should also take steps to ensure that alternative data providers are sensitive to customer privacy and security concerns and that small and midsize banks are able to take advantage of the opportunities offered by alternative data, the association added.

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