It feels as if we’re at the beginning of a seismic shift in the credit decisioning world. With the use of additional and/or alternative data in the credit decisioning process, how we apply for and approve a loan is changing.
The Consumer Financial Protection Bureau (CFPB) held a field hearing yesterday, and announced a request for information (RFI) on the pros and cons of using alternative data for credit decisioning.
CFPB Director Richard Cordray’s comments were very thorough and well balanced. If you haven’t read them, check them out here.
The RFI covers four main issues:
- Potential risks and benefits for consumers of using additional and/or alternative data to better assess their likelihood of repaying a loan.
- How introducing new alternative data sources into the credit decisioning process might add to its complexity. For example, will it make credit decisioning more difficult for people to understand and will it impact their ability to control their financial lives?
- How the use and interpretation of this data may affect privacy and transparency.
- Whether reliance on some types of alternative data could result in discrimination against certain consumers.
These are all important issues to examine and discuss, which is why Finicity will be one of many voices to weigh in on the RFI. However, the way these issues are being portrayed underplays what I believe to be the empowering benefits of new data in the process and the positive impact for consumers.
At Finicity, our goal is to help individuals and organizations make smarter financial decisions. We believe this is done by providing a rich, real-time view of an individual’s or organization’s financial health through their financial transactions. Better information leads to better insight, which ultimately leads to better decisions. All the while, the account owner is in complete control of how, when and where that data is deployed, and their data becomes a powerful tool to be utilized in any manner they see fit.
In the CFPB field hearing, it was brought up that there are approximately 45 million people who are “credit invisible” (no credit history at all) or have credit histories that are too limited or have been inactive for too long to generate a credit score, leaving them unable to receive a loan in the current system. For these people, the ability to demonstrate loan suitability through their day-to-day account activities would be a great advantage. These transactions may include income deposits, utility bills, telecom payments, rent, and others.
We’re in the foundational stages of using account information within the lending process. Right now, we’re rolling out verification of assets and income solutions to dramatically simplify and improve this aspect of the loan process. And as we progress forward, we’ll see transaction information used in ways that further speed up the lending process, improve accuracy, expand credit to those underserved, and ultimately provide a better experience for all involved.
It will be important that all voices are heard on this issue. Identifying the key challenges and having a robust discussion will benefit everyone. And our hope is that these seismic shifts will benefit a broader group of individuals and organizations through the appropriate utilization of alternative and additional data within the credit decisioning process.