Federal Banking Agencies Release Joint Statement on Use of Alternative Data for Credit Underwriting

The Joint Statement provides that a robust compliance management system is necessary in order to develop, implement and monitor the use of alternative data for underwriting. Although it states that certain types of alterative data may present greater compliance concerns than others, it highlights the use of a cash flow analysis as a potentially valuable source of alternative information for underwriting purposes. Moreover, the discussion of cash flow analysis provides some indication of factors the Agencies may consider in determining the compliance risk related to various types of alternative data. These factors may include:

• whether there is a clear connection between the data and the borrower’s creditworthiness;
• whether the data is individual to the borrower;
• whether the data can be obtained from a reliable source to ensure accuracy;
• whether the borrower controls access to data by, for example, providing express permission for the creditor to be provided access to the data; and
• whether use of the data can be disclosed and explained to the borrower as may be required under the Equal Credit Opportunity Act and the Fair Credit Reporting Act.

While the Joint Statement does not specifically enumerate these factors separately from the discussion of the merits of cash flow analysis or indicate that any one of them would be required with respect to use of alternative data, the Joint Statement does suggest that consideration of these factors will be useful to creditors in implementing and maintaining an appropriate compliance management system. As traditional lenders and financial technology companies continue to explore innovative underwriting criteria, they should remain cognizant of the Agencies’ tepid endorsement of the use of certain types of alterative data, as well as the compliance risks that may be implicated.