May 19, 2017

NAFCU to CFPB: Clarity - not rules - needed on 'alternative data' use

NAFCU, commenting Friday on the CFPB's request for information regarding use of alternative data and modeling techniques in the credit process, stressed to the bureau that no new regulations should be created to "encourage" financial institutions to use alternative forms of data to increase consumers' access to credit.

The letter also provided background on credit unions' efforts to extend credit to consumers who need it most and how those efforts could be leveraged by the bureau.

In February, the CFPB announced it was requesting comments on the use of unconventional sources of information, called "alternative data," as a way for consumers lacking credit histories to gain access to credit.

"NAFCU would like to be extremely clear – credit unions know their members best," NAFCU Senior Regulatory Affairs Counsel Michael Emancipator wrote in the association's official comment letter. "They are in prime position to determine the creditworthiness of a member. The Bureau should not create new rules or mandates in an attempt to 'encourage' financial institutions to use alternative data to increase consumer access to credit."

He stressed to the bureau that if it really wants "to spur the use of alternative data and methodologies to increase access to credit," then the bureau should remove "market uncertainties and barriers, such as ambiguous rulemakings."

He suggested that the bureau "revisit and reform existing regulations to make it simpler for credit unions to extend credit to those that are currently forced to go to non-traditional financial service providers, such as payday lenders and high-interest online lenders."

Emancipator also said the bureau could set clear expectations on any use of alternative data in assessing creditworthiness by revisiting its own authority to address unfair, deceptive, or abusive acts or practices (UDAAP). "Without clear, bright-line guidance, credit unions are often fearful of offering products that might be considered a violation of UDAAP, despite the fact that they might be for the greater benefit of their members," he wrote.

He elaborated on this idea further in the letter, which also addresses specific questions from the CFPB in its request for information. He also provided answers to the bureau regarding the types of alternative data that are used in the credit granting process, as well as the benefits and potential risks to consumers of using alternative data.