The NAFCU Journal May-June 2020 - 38

COMPLIANCE CENTRAL

Alternative Data:
Growth Opportunity or
Fair Lending Risk?
By Jennifer Aguilar

C

redit unions are committed
to providing members with
access to financial products
and services. Whether it is
banking the unbanked or reaching
the credit-invisible, credit unions are
uniquely positioned to offer products
and services specifically designed for
the needs of their community. However,
the lack of regulatory guidance or past
enforcement actions have led to uncertainty in how credit unions may employ
innovative strategies to expand product offerings.

Last year, regulators attempted to clarify
the use of alternative data in credit
underwriting. While using alternative
data in credit decision-making can
expand access to credit, ensuring the
practice is implemented in a compliant
manner with strong internal controls can
help a credit union avoid potential fair
lending concerns.

What Is Alternative Data?

In a 2017 request for information on the
use of alternative data (2017 RFI), the
Consumer Financial Protection Bureau
(CFPB) defined alternative data by looking at what constitutes traditional data.
"Traditional data" includes loan or credit
limit information, repayment history,
account status, income, length of time in
residence and information from public
records such as tax liens or bankruptcies.
All other data is considered "alternative data." Examples of alternative data
38

include loan repayment trends or patterns; rent, insurance or telephone payment history; cashflow data; frequency
of changes in residence or employment;
and social media connections.
Another example of alternative data is
advancements in credit scoring models.
In 2019, the UltraFICO Score model was
launched. This model incorporates data
about checking and savings accounts
into a consumer's credit score in addition
to traditional data. Examples include the
length of time accounts have been open,
the frequency of account transactions,
evidence of consistent cash on hand
and history of positive account balances. Under this model, consumers can

choose whether to have this information
included in their credit score.

What Are the Benefits of
Alternative Data?

The 2017 RFI and a 2015 CFPB study
on credit-invisibles, meaning those who
do not have established credit histories,
both recognized the numerous benefits
of using alternative data. The key benefit
to consumers is expanding access to
credit. Using only traditional data and
current underwriting standards, many
consumers are denied credit due to nonexistent or insufficient credit histories.
Using alternative data in the underwriting process would allow a number
of these credit-invisible consumers to
THE NAFCU JOURNAL  MAY-JUNE 2020



The NAFCU Journal May-June 2020

Table of Contents for the Digital Edition of The NAFCU Journal May-June 2020

The NAFCU Journal May-June 2020 - Cover1
The NAFCU Journal May-June 2020 - Cover2
The NAFCU Journal May-June 2020 - 1
The NAFCU Journal May-June 2020 - 2
The NAFCU Journal May-June 2020 - 3
The NAFCU Journal May-June 2020 - 4
The NAFCU Journal May-June 2020 - 5
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