The US Government Accountability Office (GAO) has called for financial regulators to pay more attention to the role played by nonbank technology companies in the consumer and small business lending market.
The GAO conducted interviews with eleven fintech lenders and found a seven-fold growth in loan volumes from such companies between 2013 and 2017 alongside increasing alliances with banks to grow their portfolios and finance their lending.
Some of the fintech lenders GAO interviewed said they use alternative data to supplement the traditional data used to make credit decisions or to detect potential fraud. Some alternative data (such as on-time rent payments) are financial and similar to traditional data, while others are nonfinancial, such as a borrower’s educational institution and degree.
Using alternative data in credit decisions presents potential benefits in the expansion of credit notes the GAO, but it also has potential risk implications relating to fair and accurate decision-making.
"The Bureau of Consumer Financial Protection (BCFP) and federal banking regulators have monitored fintech lenders’ use of alternative data by collecting information and developing reports on alternative data," observes the GAO. "But they have not provided lenders and banks with specific guidance on using the data in underwriting. For example, BCFP’s fair lending examination procedures and the banking regulators’ third-party guidance on risk do not clearly communicate the agencies’ views on the appropriate use of alternative data."
Nine of the 11 fintech lenders GAO interviewed said additional guidance would be helpful to clarify regulatory uncertainty, which some lenders identified as a barrier to further financial innovation in expanding access to credit. Further, federally regulated banks that have partnered with fintech lenders told GAO that clarification on appropriate use of alternative data would help them manage their relationships with those lenders.
GAO recommends that BCFP and the federal banking regulators communicate in writing to fintech lenders and banks that partner with fintech lenders, respectively, on the appropriate use of alternative data in the underwriting process. The agencies each stated that they plan to take action to address GAO’s recommendations
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