The Consumer Financial Protection Bureau (“CFPB” or “Bureau”) recently announced an effort to better understand how “alternative data” could be used to expand access to credit. Through a formal notice and request for information just published, the CFPB is trying to learn more about the potential to use what it calls “non-traditional” or “alternative” data points to develop credit scores. These data items include occupation, length of time in a particular job or residence, behavioral data, such as shopping habits, and information about consumers’ friends and associates gleaned from social media networks (among other things). The CFPB believes that use of this data could help provide credit scores to the “credit invisibles” – the roughly 45 million Americans who have limited, stale, or no credit history – and potentially move those consumers into mainstream credit products with more affordable terms. While not the CFPB’s current area of focus, they also welcome information about alternative data and modeling techniques in business lending markets.
Using alternative data makes sense in light of advancements in technology, proliferation of social media, and the ubiquitous exchange and sharing of information in numerous contexts. But there are a number of potential pitfalls that could lead to unintended violations of consumer financial laws – something the Bureau acknowledges in its notice.
One key area that appears particularly risky is furnishing consumer credit-related data and the related process of handling disputes concerning the accuracy of that data. Issues related to furnishing and disputes have remained a priority for the CFPB since it opened its doors as evidenced through bulletins and public remarks focused on credit reporting issues. The CFPB has also brought a series of enforcement actions concerning alleged inaccurate reporting, failure to correct or delete credit reporting errors in a timely fashion, and failure to investigate consumer disputes.
Against that backdrop, it is clear that entities should tread with caution if they are using – or considering the use of – alternative data to make credit decisions. While the CFPB has laudable intentions of increasing access to credit, its focus on often technical issues with respect to furnishing credit information and resolving consumer disputes could expose well-intended companies to enforcement activity. This is particularly true in the credit reporting space where requirements are highly technical and governed by lengthy and detailed manuals as well as the strict standards imposed by the Fair Credit Reporting Act (“FCRA”). In the case of alternative data, it is unclear in some instances precisely how data would be sourced, coded, reported, verified or otherwise governed by the FCRA. For example, if behavioral data like shopping habits is used to derive a credit score, who would provide that information and how would a consumer dispute inaccuracies? The same is true for educational attainment. Will consumers need to produce a diploma to verify any degrees they obtain? The Bureau also raises the concern that as use of alternative data to make credit decisions grows, it may become more difficult to explain credit decisions to consumers, and consumers may believe that it is more difficult to change their score through their own financial conduct.
These concerns will likely be fleshed out as the CFPB gathers additional information on alternative data. The CFPB will receive comments until May 19, 2017. The CFPB appears open to working with industry participants to finding effective ways to harness and leverage that data. If the Bureau remains flexible – and refrains from penalizing companies who work in good faith towards workable solutions – the use of alternative data could provide better access to credit for all Americans.
Leonard A. Bernstein is the managing partner of Reed Smith’s Philadelphia office, a member of the Financial Industry Group, and founded and chairs the firm’s Financial Services Regulatory Group (FSRG). He concentrates his practice in the representation of banks, mortgage bankers and finance companies in providing consumer credit compliance advice on federal, Pennsylvania and New Jersey laws and regulations.
Paul Bond is a partner at Reed Smith, co-practice leader of the Information Technology, Privacy & Data Security Group, and member of the IP, Information & Innovation Group. He focuses his practice in the areas of data security, privacy, and management.
Maria B. Earley is a partner at Reed Smith where she advises and represents financial services companies in enforcement, examination, litigation, transactional and counseling matter.