The potential of alternative data in consumer lending decisions continues to be a hot topic in Washington, D.C., with the latest evidence seen in developments related to the Community Reinvestment Act (CRA). When federal banking agencies recently revised their Q&As for CRA compliance, their focus on the use of alternative data caught my eye. This development is welcome news for those here at FICO and for our many existing and prospective customers.
Adopted in 1977, the CRA is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods. The Act requires federal banking agencies (the OCC, FDIC and Federal Reserve – “Agencies”) to conduct periodic reviews of each depository institution’s efforts in this area. CRA regulations provide various methods of evaluating bank performance, corresponding to differences in institutions’ asset sizes, structures and operations. After a thorough assessment of the institution, bank examiners assign a CRA rating and issue a public performance evaluation.
CRA regulations allow a financial institution’s lending performance to be evaluated, in part, by the institution’s “use of innovative or flexible lending practices in a safe and sound manner to address the credit needs of low- or moderate-income individuals or geographies.” Notably, the latest version of the Q&A guidance includes a new clarification of this standard involving the use of alternative credit histories in mortgage and consumer lending programs. The Agencies discuss the use of alternative data, such as rent and utility payments, “to evaluate low- or moderate-income individuals who lack sufficient conventional credit histories and who would be denied credit under the institution’s traditional underwriting standards.” The Agencies consider this use of alternative credit histories as an “innovative or flexible lending practice” that enhances the “success and effectiveness” of the institution’s lending program.
This revised CRA guidance gives financial institutions an additional reason to adopt scoring innovations that leverage alternative data responsibly to expand credit access for communities with low- or moderate-income consumers.
Responsibly expanding credit access has always been a central focus at FICO. This April, FICO and our partners, LexisNexis® and Equifax®, announced the availability of an alternative data score, FICO® Score XD. This score leverages data found outside the traditional credit file to identify creditworthy individuals among the 50+ million unscorable consumers in the US. FICO® Score XD considers alternative data such as cable, landline, mobile and utility payments, along with select public record information.
FICO® Score XD is being piloted by many of the largest lenders for use in bankcard and other unsecured lending programs, and we have plans to expand it to additional loan types. FICO research shows that the score can serve as an on-ramp to the mainstream credit market for people who otherwise might have great difficulty in obtaining credit.
My colleague has written a series of blog posts detailing our research and the promise that this new score holds. We’re excited about the results we’ve seen so far – and to see like-minded enthusiasm from regulators and policy makers about the emerging potential of alternative data in lending.