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1 [1] (August 27, 2020)

handle is hein.crs/govdbmg0001 and id is 1 raw text is: Alternative Data in Financial Services August 27,2020 Alternative data generally refer to information used to determine a consumer's creditworthiness that the national consumer reporting agencies-Equifax,Experian, and TransUnion-do not traditionally use to calculate a credit score. These reporting agencies generally create consumer reports containing historical information about repayment on credit products such as mortgages, student loans, credit cards, and auto loans. Credit applications, bankruptcies, and debts in collection also are regularly included. In contrast, alternative data include additional consumer financial data not regularly contained in traditional credit files. New technology makes it possible for financial institutions to gather other information, including financial and nonfmanicaldata, froma variety of sources. The Consumer Financial Protection Bureau (CFPB) included the following list of alternative data examples in a 2017 requestforinformation: Data showing trends or patterns in traditional loan repayment data. Payment data relating to non-loan products requiring regular (typically monthly) payments, such as telecommunications, rent, insurance, or utilities. 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 consumers interact with a web interface or answer specific questions, or data about how they shop, browse, use devices, ormoveabout theirdaily lives. Data about consumers' friends and associates, including dataaboutconnections on socialmedia. These data canbe usedeitherin creditreports orby lenders directly to underwrite a loan (i.e., to determine whether to lend to a consumer and at what price). Recent findings suggest that some types of alternative data-suchas education, employment, and cash-flowinformation-might offer a promising way to expand access to credit. However, the collection anduse of alternative data raise policy concerns related to consumer protection and privacy. Using Alternative Data in CreditRe Alternativedatahave thepotential to expand the number of consumers in the traditional credit reporting system. Accordingto the CFPB,credit scores cannotbe generated for approximately 20% of the U.S. population due to their limited credit histories. The CFPB categorizes consumers with limited credit his tories into several groups. One category of consumers, referred to as credit invisibles, have no credit record at the three nationwide credit reporting agencies and, thus, do notexist for the purposes of credit reporting. Credit invisibles represent 11% of the U.S. adult population, or 26 million consumers. Another category of consumers have a credit record, but they cannot be scored or are considered unscorable. Unscorable consumers either have insufficient (short) histories or stale (outdated) histories. The insufficient and s tale unscored groups,eachcontaining more than 9million individuals, collectively represent 8.3% of the U.S. adult population, or approximately 19 million consumers. Figure I.Credit Invisible and Unscorable Consumers as of 2010 Source: See Kenneth P. Brevoort, Philipp Grimm, and Michelle Kambara, Data Point: Credit Invisibles, CFPB, May 20 I 5, p. 6, at http://files.consumerfinance.gov/f/201505_cfpb-data-point-credit- invisibles.pdf. Alternativedatacould be used to calculate scores for some consumers with limited credit history, which would allow lenders using these scores to better determine the creditworthiness ofpeople in this group. Moreover, alternative data used in the credit reporting systemcould increase credit reporting accuracy for all consumers by yg

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