WASHINGTON–A new report from the Government Accountability Office (GAO) calls on government agencies to do a better job of communicating with fintechs on how to better use alternative data and credit report data when making loan decisions.
The report, Financial Technology: Agencies Should Provide Clarification on Lenders’ Use of Alternative Data, found the use of alternative data, such as supplementing traditional data with information about a borrower’s college degree – may make loans available to more people, but also suggests the use of such data could also have unintended effects.
“GAO recommends that (Consumer Financial Protection Bureau) and the federal banking regulators communicate in writing to fintech lenders and banks that partner with fintech lenders, respectively, on the appropriate use of alternative data in the underwriting process,” the GAO report states.
The GAO added federal agencies have each stated that they plan to take action to address GAO’s recommendations.
Lacking Specific Guidance
The report further noted that the Bureau and financial regulators have been monitoring fintech lenders’ use of alternative data by collecting information and developing reports on alternative data.
“But they have not provided lenders and banks with specific guidance on using the data in underwriting,” according to the GAO findings.
“Nine of the 11 fintech lenders GAO interviewed said additional guidance would be helpful to clarify regulatory uncertainty, which some lenders identified as a barrier to further financial innovation in expanding access to credit,” the report states. “Further, federally regulated banks that have partnered with fintech lenders told GAO that clarification on appropriate use of alternative data would help them manage their relationships with those lenders.”
A Reminder
The GAO reminded that agencies are required to externally communicate the necessary quality information to achieve their objectives.
“With clear communication from BCFP and the federal banking regulators on appropriate use of alternative data in the underwriting process, fintech lenders would have greater certainty about their compliance with fair lending and other consumer protection laws, and federally regulated banks may be better able to manage the risks associated with partnering with fintech lenders that use these data,” the GAO stated.