Federal Reserve facilitate approval of personal loans
It may become easier for some personal loan applicants to obtain a loan after federal regulators this week announced that they are encouraging the use of “alternative data” in credit underwriting standards – provided that it is. done responsibly.
The Federal Reserve and four other agencies have said certain information, such as cash flow data, could expand access to credit.
“To the extent that businesses use or consider using alternative data, agencies encourage responsible use of that data,” the joint statement from the Fed, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation said, of the Office of the Comptroller of Foreign Affairs. the Mint and the National Credit Union Administration.
“The agencies recognize that the use of alternative data can improve the speed and accuracy of credit decisions and can help businesses assess the creditworthiness of consumers who currently cannot obtain credit under the traditional credit system,” said they declared.
“The use of alternative data may allow consumers to obtain additional products and / or more favorable prices / terms based on improved assessments of repayment capacity,” they added. “These innovations reflect the continuing evolution of automated underwriting and credit rating modeling, offering the potential to lower the cost of credit and increase access to credit. ”
“The use of alternative data can allow consumers to obtain additional products and / or more favorable prices / terms based on improved assessments of repayment capacity”.
The agencies’ statement comes as alternative data – which can range from cell phone bills to utility payments, rent payments and education level – is already being used by some banks and online lenders to assess applicants. .
Payments on credit cards, mortgages, student loans, and auto loans are some of the classic data points that lenders can track on a credit report when deciding to extend a loan and on what terms. ‘interest.
But some potential applicants might not have this kind of history on their credit report, which could make lenders more reluctant to extend a loan. An estimated 45 million consumers are “invisible when it comes to credit” because they do not have a credit report that can be assessed, according to the CFPB.
“Alternative data” can flesh out an image of an applicant’s financial health, but consumer advocates fear that some of the data could be misused. For example, utility payments could increase after a heat wave or cold snap, which could lead to large bills, late payments, and derogatory information on a case.
Tuesday’s joint statement did not focus on all types of alternative data, but said the cash flow data could be promising.
“Improving the measurement of income and expenditure through cash flow assessment can be particularly beneficial for consumers who demonstrate reliable income patterns over time from a variety of sources rather than just one. work, “the statement read.
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This type of analysis of stable money inflows and outflows, regardless of job title, could be particularly useful for workers who find steady money in the odd-job economy.
The release said alternative data could also be useful in “second look” programs where lenders re-screen consumers who have previously been denied credit.
Chi Chi Wu, a lawyer with the National Consumer Law Center, an organization that advocates for strong consumer protections, said the statement overall was encouraging and could lift more people out of the invisibility of credit.
“The alternative data itself can be good or bad,” she said. The tone of the statement “is measured,” Wu said, adding that cash flow was “probably one of the most promising alternative data types.”
“This kind of statement obviously matters because it says to be careful, but it could be helpful,” Wu said.