Pub. 14 2019-2020 Issue 5

NEBRASKA BANKERS ASSOCIATION 15 In considering the use of alternative data, the GAO noted that there were a number of benefits and risks to the use of financial data. Among the poten- tial benefits were expansion of credit, improved pricing, faster credit decisions and fraud prevention. fintech lending issues, both lending directly originated by fintechs and lending in bank/fintech partnerships. The GAO found that, of the fintechs they interviewed, “nearly all” had partnered with federally regulated banks. The GAO was par- ticularly focused on the use of “alternative data” by fintechs. The GAO took “alternative data” to mean information not traditionally used by the three national consumer reporting agencies to calculate credit scores. Examples of alterna- tive data could include both financial data (such as on-time rental payments, utility payments and cash flow informa- tion) and nonfinancial information (such as the educational institution attended by an applicant and the degree ob- tained, social media activity and internet browser history). Alternative data may be obtained from a variety of sources, including the borrower, data aggregators, national databases and other sources. According to the GAO, alternative data is mostly used to supplement traditional data but could also (although much less commonly) be used exclusively (in lieu of traditional data). The GAO noted that alternative data was used not just for credit underwriting, but also for fraud prevention, pricing and identity verification purposes. In considering the use of alternative data, the GAO noted that there were a number of benefits and risks to the use of financial data. Among the potential benefits were expansion of credit, improved pricing, faster credit decisions and fraud prevention. Risks included disparate impact, lack of transpar- ency, difficulty ascertaining reliability, previous lack of use in an economic downturn and cybersecurity risks. The GAO also discussed a variety of state and federal regulatory challenges relevant to fintech lending, not all of which were directly relevant to the use of alternative data. The GAO also listed examples of consumer protection laws relevant to fintech lending, including the Electronic Fund Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Investment Advisers Act of 1940, the Securities Act of 1933, the Dodd Frank Wall Street Reform and Consumer Protection Act (prohibiting UDAAPs), the Federal Trade Commission Act (pro- hibiting UDAPs), and the Gramm-Leach-Bliley Financial Mod- ernization Act. While noting that federal regulators have taken some steps tomonitor use of alternative data, the GAO observed that existing guidance on the proper use of alternative data was limited. Both fintech lenders and banks told the GAO that additional guidance on the appropriate use of alternative data would be helpful in resolving regulatory uncertainties. Banks in particular noted that clarification could help them manage their relationships with fintech lenders. The GAO recommended that the federal banking regulators should communicate in writ- ing with fintech lenders and the banks that partner with them on the appropriate use of alternative data in the underwriting process, including issues to consider when selecting the types of alternative data to use. Interagency Statement Although lacking detailed and specific guidance for banks, the Interagency Statement does make some brief observations about the use of alternative data that might serve as a starting point for banks considering a move into this area: • If there were a question about whether the use of alter- native data was permissible, the Interagency Statement does at least recognize its use and potential benefits. Use of alternative data is compared to prior developments in the evolution of credit underwriting. From there, the Statement focuses on how to effectively leverage these new technological developments and still comply with applicable law. • Although relegated to a footnote, the Statement clarifies that it applies to use of data rather than on furnishing, compiling or transferring it. Banks that are engaged in the latter should of course consider the Fair Credit Reporting Act implications of doing so. • Alternative data usage obviously must comport with safety and soundness requirements. Data controls must, among other things, include “rigorous” assessment of the quality and suitability of the data to support prudent banking operations. Counselor's Corner — continued on page 16