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It could become easier for some personal-loan applicants to secure a loan after federal regulators announced this week that they encourage the use of “alternative data” in credit underwriting standards — so long as it’s done responsibly.
The Federal Reserve and four other agencies said certain information, like cash flow data, could broaden access to credit.
“To the extent firms are using or contemplating using alternative data, the agencies encourage responsible use of such data,” said the joint statement[1] comes from the Fed, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the National Credit Union Administration.
“The agencies recognize that use of alternative data may improve the speed and accuracy of credit decisions and may help firms evaluate the creditworthiness of consumers who currently may not obtain credit in the mainstream credit system,” they said.
“Using alternative data may enable consumers to obtain additional products and/or more favorable pricing/terms based on enhanced assessments of repayment capacity,” they added. “These innovations reflect the continuing evolution of automated underwriting and credit-score modeling, offering the potential to lower the cost of credit and increase access to credit.”
The agencies’ statement comes as alternative data — which can range from cellphone bills to utility payments, rent payments and educational attainment[2] — is already being used by some banks and online lenders to evaluate applicants.
Payments on credit cards, mortgages, student loans and auto loans are some of the conventional data points that lenders can track in a credit file when deciding...