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1 [1] (November 7, 2024)

handle is hein.crs/goverfz0001 and id is 1 raw text is: Alternative Data in Financial Services Alternative data generally refers to information used to determine a consumer's creditworthiness that the national consumer reporting agencies (CRAs)-Equifax, Experian, and TransUnion-have not traditionally used to calculate credit scores. These CRAs generally create consumer reports with historical information about repayment on credit products such as mortgages, student loans, credit cards, and auto loans. Credit applications, bankruptcies, and debts in collection are also regularly included. New technology makes it possible for financial institutions to gather this alternative data, which include financial and nonfinancial data, from a variety of sources. Examples of alternative data can include payment history in telecommunications, rent, or utilities; checking account transaction information; educational or occupational attainment; how consumers shop, browse, or use devices; and social media information. Some of this information is now commonly used in certain types of credit underwriting and scoring. This alternative data can potentially enable CRAs and financial firms to score and underwrite credit to borrowers who would otherwise be denied credit, but it may present novel risks as well. In the 118th Congress, legislation has been introduced to encourage increased usage of alternative data. Among the bills introduced are bills that would require federal agencies to incorporate alternative data in mortgage underwriting (H.R. 123 and H.R. 1266), enable/require reporting of rental or utility payments (S. 1654/H.R. 3418, S. 4944), and expand federal regulators' use of sandboxes, which allow firms to experiment without regulatory action (H.R. 9309/S. 4951, H.R. 6584). Dfferent Uses of Alternative Data Two prominent ways alternative data are used are in credit reporting and lending by financial technology (fintech) companies. Credit Reporting According to the Consumer Financial Protection Bureau (CFPB) in 2015, credit scores cannot be generated for approximately 20% of the U.S. population due to their limited credit histories. This statistic, the most recent provided by the CFPB, pre-dates many innovations in credit scoring that may have improved coverage. Those without credit scores skew lower-income and younger and are more likely to be minorities. Figure 1 shows the share of Americans by census tract income level that are considered (1) credit invisible with no information available, (2) stale unscored with no recent information, and (3) insufficient unscored with a lack of information for traditional scoring. The share of consumers in any of these Updated November 7, 2024 groups is highest in the low-income census tract (46%) and lowest in the upper-income category (7%). Figure I. Share of Consumers Unscored by Census Tract Income Level score a broader swathe of the population. Research from Experian found that incorporating alternative data could help score 8.4 million previously unscorable borrowers. Further, alternative data could improve existing scores. Research from TransUnion found that when rent payments were included in consumers' credit files, consumers 1experienced an average increase of nearly 60 points to their credit score. These increases were disproportionately for consumers with low credit scores. The national CRAs have increasingly used alternative data in at least som wte models that they develop, but incorporating this data often requires a borrower to opt in. Specifically, Experian has developed a platform called Experian Boostatcan fond the past two years of positive payment history for consumers' rent, internet, utility, or phone payments that are made through their banks, credit cards, or other service providers. Data used by CRAs is regulated by the Fair Credit Reporting Act (15 U.S.C. 1681), meaning such data must still be displayable, disputable and correctable. Fannie Mae and Freddie Mac have partnered with fintechs such as Esusu to encourage reporting of on-time rents in property management software. According to Freddie Mac, 10% of renters see their on-time rental payments reflected in their scores, so significant challenges remain in capturing rents or other measures of alternative data. Traditionally, such data was reported to credit bureaus only when delinquent, so such programs can encourage increased reporting of positive payment history.

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