Alternative Data in Financial Services
August 27, 2020
Alternative Data in Financial Services
Alternative data generally refer to information used to
education, employment, and cash-flow information—might
determine a consumer’s creditworthiness that the national
offer a promising way to expand access to credit. However,
consumer reporting agencies—Equifax, Experian, and
the collection and use of alternative data raise policy
TransUnion—do not traditionally use to calculate a credit
concerns related to consumer protection and privacy.
score. These reporting agencies generally create consumer
reports containing historical information about repayment
Using Alternative Data in Credit Reports
on credit products such as mortgages, student loans, credit
Alternative data have the potential to expand the number of
cards, and auto loans. Credit applications, bankruptcies, and
consumers in the traditional credit reporting system.
debts in collection also are regularly included. In contrast,
According to the CFPB, credit scores cannot be generated
alternative data include additional consumer financial data
for approximately 20% of the U.S. population due to their
not regularly contained in traditional credit files. New
limited credit histories. The CFPB categorizes consumers
technology makes it possible for financial institutions to
with limited credit histories into several groups. One
gather other information, including financial and
category of consumers, referred to as “credit invisibles,”
nonfinanical data, from a variety of sources.
have no credit record at the three nationwide credit
reporting agencies and, thus, do not exist for the purposes
The Consumer Financial Protection Bureau (CFPB)
of credit reporting. Credit invisibles represent 11% of the
included the following list of alternative data examples in a
U.S. adult population, or 26 million consumers. Another
2017 request for information:
category of consumers have a credit record, but they cannot
be scored or are considered “unscorable.” Unscorable
Data showing trends or patterns in traditional loan
consumers either have insufficient (short) histories or stale
repayment data.
(outdated) histories. The insufficient and stale unscored
groups, each containing more than 9 million individuals,
Payment data relating to non-loan products
collectively represent 8.3% of the U.S. adult population, or
requiring regular (typically monthly) payments,
approximately 19 million consumers.
such as telecommunications, rent, insurance, or
utilities.
Figure 1.Credit Invisible and Unscorable Consumers
as of 2010
Checking account transaction and cashflow data
and information about a consumer’s assets, which
could include the regularity of a consumer’s cash
inflows and outflows, or information about prior
income or expense shocks.
Data that some consider to be related to a
consumer’s stability, which might include
information about the frequency of changes in
residences, employment, phone numbers or email
addresses.
Data about a consumer’s educational or
occupational attainment, including information
about schools attended, degrees obtained, and job
positions held.
Behavioral data about consumers, such as how
Source: See Kenneth P. Brevoort, Philipp Grimm, and Michel e
consumers interact with a web interface or answer
Kambara, Data Point: Credit Invisibles, CFPB, May 2015, p. 6, at
specific questions, or data about how they shop,
http://files.consumerfinance.gov/f/201505_cfpb_data-point-credit-
browse, use devices, or move about their daily lives.
invisibles.pdf.
Data about consumers’ friends and associates,
including data about connections on social media.
Alternative data could be used to calculate scores for some
consumers with limited credit history, which would allow
These data can be used either in credit reports or by lenders
lenders using these scores to better determine the
directly to underwrite a loan (i.e., to determine whether to
creditworthiness of people in this group. Moreover,
lend to a consumer and at what price). Recent findings
alternative data used in the credit reporting system could
suggest that some types of alternative data—such as
increase credit reporting accuracy for all consumers by
https://crsreports.congress.gov
Alternative Data in Financial Services
including additional information beyond that which is
status, age, and “because all or part of the applicant’s
traditionally used. Arguably, this could increase access to—
income derives from any public assistance program.”
and lower the cost of—credit for some individuals , in cases
Alternative data may pose fair lending risks if they are
where alternative data are able to identify new creditworthy
correlated with ECOA-protected characteristics, such as
consumers. However, in cases where the alternative data
race or ethnicity. In these cases, lenders’ uses of alternative
include negative information, some consumers face the
data to make credit decisions could result in disparate
possibility of being denied credit.
impacts.
Fintech Lending
Privacy and Consumer Protection Issues. Some
Some lenders currently use alternative data directly to make
prospective borrowers may be unaware that alternative data
credit decisions, in addition to or instead of information in
have been used in credit decisions, raising privacy and
the credit reporting system. These lenders generally gain
consumer protection concerns. For example, some
access to alternative data on prospective borrowers either
consumers may not know what specific information
through publicly available information or with the
alternative credit scoring systems use and how to improve
borrower’s permission.
the credit scores produced by these models . In an effort to
address such concerns, many consumer reporting agencies
One market segment is particularly illustrative of this
and firms use alternative data only when consumers choose
practice. With the proliferation of internet access and data
to participate (i.e., opt-in).
availability, some new lenders—often referred to as
marketplace lenders or fintech lenders—rely on online
Regulator Policy. The CFPB and federal banking
platforms and frequently underwrite loans using alternative
regulators have been monitoring alternative data
data. Although fintech lending remains a small part of the
developments in recent years. In December 2019, they
consumer lending market, it has grown rapidly in recent
released a brief policy statement on the appropriate use of
years. In addition, incumbent bank and nonbank lenders
alternative data in the underwriting process, highlighting
have adopted certain of these technologies and practices to
the potential benefits and risks. The release followed an
varying degrees and, in some cases, have partnered or
October 2017 statement from the CFPB, outlining nine
contracted with fintech companies to build or run online,
principles for consumer-authorized financial data sharing
algorithmic platforms.
and aggregation. These principles included, among other
things, consumer access and usability, consumer control
Financial Regulatory Policy Issues
and informed consent, and data security and accuracy.
Regulatory Considerations for Alternative Data
Providers and Users. Although alternative data could be
Selected Legislation: 116th Congress
used to expand access to credit, such data also raise
Using alternative data for credit underwriting continues to
regulatory compliance questions. In particular, the presence
be the subject of congressional interest and legislative
of two statutes pertaining to the use of credit reporting and
proposals. In the 116th Congress, the House passed H.R.
underwriting may be a reason why adoption of alternative
3621, the Comprehensive Credit Reporting Enhancement,
data in the credit reporting system and by lenders is
Disclosure, Innovation, and Transparency Act of 2020
currently limited.
(Comprehensive CREDIT Act). Among other things, this
bill would direct the CFPB to report to Congress on the
The main statute regulating the credit reporting industry is
impact of using nontraditional data on credit scoring. In
the Fair Credit Reporting Act (FCRA; 15 U.S.C. §1681 et
addition, in most cases, it would allow payment history of
seq.), which establishes consumers’ rights in relation to
rent, utilities, and telecommunication bills to be furnished
their credit reports, such as the right to dispute inaccurate or
to the credit reporting agencies.
incomplete information in their reports. The act also
imposes certain responsibilities on those who collect,
CRS Resources
furnish, and use the information contained in consumers’
CRS Report R45979, Financial Inclusion and Credit
credit reports. Alternative data providers outside of the
Access Policy Issues, by Cheryl R. Cooper.
traditional consumer credit industry, such as
telecommunications and utility providers, may not have an
CRS Report R46332, Fintech: Overview of Innovative
incentive to furnish information to the credit reporting
Financial Technology and Selected Policy Issues,
agencies. These companies do not use credit reports in their
coordinated by David W. Perkins .
businesses, so they do not need to be part of the credit
reporting system. If these companies were to furnish
CRS Report R45631, Data Protection Law: An Overview,
information, then they would need to comply with FCRA
by Stephen P. Mulligan, Wilson C. Freeman, and Chris D.
requirements, such as managing consumer disputes.
Linebaugh.
Therefore, some organizations may be discouraged from
furnishing alternative data, even if the data could help some
CRS Report R44125, Consumer Credit Reporting, Credit
consumers become scorable or increase their credit scores.
Bureaus, Credit Scoring, and Related Policy Issues, by
Cheryl R. Cooper and Darryl E. Getter.
In addition, the Equal Credit Opportunity Act (ECOA; 15
U.S.C. §§1691-1691f) generally prohibits discrimination in
Cheryl R. Cooper, Analyst in Financial Economics
credit transactions based upon certain protected classes,
including sex, race, color, national origin, religion, marital
IF11630
https://crsreports.congress.gov
Alternative Data in Financial Services
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permissio n of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF11630 · VERSION 1 · NEW