The CFPB has issued a request for information (RFI) that seeks information about the use of alternative data and modeling techniques in the credit process. On March 21, 2017 from 12:00 to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar: The New Frontier of Alternative Credit Models: Opportunities, Risks and the CFPB’s Request for Information. A link to register is available here.
According to the CFPB, the RFI stems from the Bureau’s desire “to encourage responsible innovations that could be implemented in a consumer-friendly way to help serve populations currently underserved by the mainstream credit system.” The CFPB had signaled the likelihood of future action relating to alternative credit data in a May 2015 report, “Data Point: Credit Invisibles,” that reported the results of a research project undertaken by the CFPB to better understand the demographic characteristics of consumers without traditional credit reports or credit scores. The report, which the RFI cites, concluded that the current credit reporting system is precluding certain populations from accessing credit and taking advantage of other economic opportunities.
In conjunction with the RFI’s issuance, the CFPB held a field hearing on alternative credit data in Charleston, West Virginia at which Director Cordray gave remarks. (In a break from its prior practice, the CFPB did not publish advance notice of the field hearing on its website.)
In the RFI’s Supplementary Information, the CFPB states that it not only seeks information relating to consumer credit but, “because some of the Bureau’s authorities relate to small business lending,” it “welcomes information about alternative data and modeling techniques in business lending markets as well.” To that end, for many of the specific questions asked in the RFI on which the CFPB seeks comments, the CFPB asks commenters to describe “any differences in your answers as they pertain to lending to businesses (especially small businesses) rather than consumers.” (The CFPB notes the ECOA’s coverage of consumer and business credit and that it has begun the process of writing regulations to implement Dodd-Frank Section 1071, which requires data collection and reporting for lending to women-owned, minority-owned, and small businesses.) Comments on the RFI must be received on or before May 19, 2017.
The Supplementary Information includes a discussion of alternative data and modeling techniques in which the CFPB provides examples of the types of data and modeling techniques that have been labeled “alternative.” It also discusses prior research by other federal regulators, such as the FTC’s report on big data. (The CFPB notes that the non-traditional data that might be used to assess borrower creditworthiness could include “big data.” To address the growing interest in the use of “big data” and “machine learning” by a wide range of businesses, we recently held a webinar, “Big Data and Computer Learning – Lots of Opportunity and Lots of Legal Risk.”)
In the Supplementary Information, the CFPB lists potential consumer benefits and risks it has identified and states that it intends to use the information gleaned from the RFI’s questions “to help maximize the benefits and minimize the risks” from the use of alternative data and modeling techniques. The RFI contains 20 specific questions (most of which have numerous subsidiary questions) that are divided into four sections: alternative data, alternative modeling techniques, potential benefits and risks to consumers and market participants, and specific statutes and regulations as they pertain to alternative data and modeling techniques. The CFPB notes that although each question speaks generally about all decisions in the credit process, “answers can differentiate, as appropriate, between uses in marketing, fraud detection and prevention, underwriting, setting or changes in terms (including pricing), servicing, collections, or other relevant aspects of the credit process.”
The CFPB states in the RFI that it not only seeks to understand the benefits and risks stemming from the use of alternative data and modeling techniques, but “also to begin to consider future activity to encourage their responsible use and lower unnecessary barriers, including any unnecessary regulatory burden or uncertainty that impedes such use.” We hope the CFPB’s issuance of the RFI reflects its recognition of the complexity of the issues involved in the use of alternative data and modeling techniques and the need for it to carefully consider the interests of all stakeholders.