GAO: Regulators Should Provide Better Guidance on Use of Alternative Data

Federal banking agencies, including the National Credit Union Administration and Consumer Financial Protection Bureau, should develop specific directions on how credit unions and banks may use alternative data in the credit underwriting process, the Government Accountability Office said in a new report.

“The Federal Reserve and other banking regulators have issued an interagency statement that highlights potential benefits and risks of using alternative data and encourages firms to responsibly use the data,” the GAO said, in its report. The GAO said that the use of alternative data presents a variety of benefits. and risks, but that the interagency statement, issued in 2019, did not go far enough in stating how alternative data may be used.

“We recommended that the Federal Reserve coordinate with other federal banking regulators and the Consumer Financial Protection Bureau to communicate in writing to banks that engage in third-party relationships with fintech lenders on the appropriate use of alternative data in the underwriting process, including issues to consider when selecting types of alternative data to use,” the GAO said.

So far, the banking agencies have not done so, the GAO said. The GAO said that the 2019 statement issued by the banking agencies did not provide specific direction on the appropriate use of the data, including which alternative data to use.

The 2019 statement said that, “a well-designed compliance management program provides for a thorough analysis of relevant consumer protection laws and regulations to ensure firms understand the opportunities, risks and compliance requirements before using alternative data.” It added that “robust compliance management includes appropriate testing, monitoring and controls to ensure consumer protection risks are understood and addressed.”

The agencies said that as officials gain a deeper understanding of how alternative data is used, the agencies may offer additional information on its appropriate use. “Firms may choose to consult with appropriate regulators when planning for the use of alternative data,” the 2019 statement said.

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