Alternative data recognized by five federal agencies, an ID Analytics viewpoint
Earlier this week, five federal financial regulatory agencies issued a joint statement on the use of alternative data in underwriting by banks, credit unions, and non-bank financial firms. These agencies noted several benefits 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.
Since 2007, ID Analytics has provided solutions that help our clients leverage alternative data to identify more creditworthy consumers and provide competitive pricing. We asked our Head of Marketing, Kevin King and Chief Compliance Officer, Ken Meiser what stood out for them from the announcement made by the Federal Reserve Board (Federal Reserve), the Consumer Financial Protection Bureau (CFPB), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the National Credit Union Administration (NCUA).
King: The statement by the feds supports the maturity of alternative data solutions and their use for expanding access to credit, something our clients have been doing for years. While it was not news to ID Analytics that these agencies recognized the benefits of using alternative data in credit underwriting, it was extremely notable that they recognize that the use of alternative data may improve the speed and accuracy of credit decisions and help firms evaluate the creditworthiness of consumers who may not otherwise obtain credit via the mainstream credit system.
I would add that it is essential to differentiate between the types of alternative credit data on the market. When ID Analytics talks about alternative data, our definition is credit seeking and payment behaviors sourced from industries that are not typically included in traditional credit reports, such as telecommunication providers, subprime lenders, checking accounts, and online lenders. I would differentiate alternative credit data from experimental data, such as social media data that looks at a person’s network of connections and activities online and attempts to assess consumer creditworthiness through something other than the individual’s history of managing credit responsibilities.
Meiser: To add to Kevin’s comment, the type of alternative data that ID Analytics employs is analogous to other types of reporting, such as through the nationwide consumer reporting agencies (NCRAs). However, it takes into consideration the various ways that consumers build their financial lives today. Additionally, I want to emphasize the importance of taking disparate impact and fair lending into consideration with the use of alternative data. It is critical to have a provider, like ID Analytics and its subsidiary consumer reporting agency Sagestream, LLC, who creates effective models with the governance processes to support the regulatory obligations and the quantified impact on thin-file and no-hit consumers as well as enhanced understanding of the behaviors associated with thick-file consumers.
King: To Ken’s point, our data looks at a variety of financial responsibilities consumers have that help them build credit, outside of the data that is typically factored into traditional credit scores. We have conducted several studies that demonstrate how alternative scoring models could increase account activation rates for consumers who are often credit invisible—meaning they may be unable to be scored by a NCRA. For example, we applied alternative credit data to the portfolio of one top-10 U.S. credit card issuer and discovered that 40 percent of the non-booked credit invisible population were credit eligible based on the card issuer’s credit policy. While the ability for alternative data to better assess the credit standing of invisible consumers is well documented, ID Analytics has consistently found that alternative data has an ability to better assess credit visible consumers – individuals who have a credit score. This is really the next frontier of alternative credit data, using a broader understanding of consumer credit behaviors to develop a more predictive risk assessment for individuals across the credit spectrum – from sub-prime to prime.
Meiser: One final note, we published new research this year, Making the credit invisible, visible: A study on the benefits of alternative credit data, in response to CFPB findings that demonstrated gaps in accessibility to credit still remain and that there are specific segments of U.S. consumers who are impacted more heavily. Our research supports the use of alternative credit data for providing access to consumers in a responsible way. We have been working on this for years and have learned how to produce models that incorporate data that is more credible and consistent. The recognition of the benefits of alternative data by these financial regulatory agencies is encouraging for the future of lending.
For more information on the joint statement, read the Interagency Statement on the Use of Alternative Data in Credit Underwriting. Visit our website, to learn more about ID Analytics’ credit risk solutions.