Scholar argues that new data sources will expand access to credit and raise questions of privacy and fairness.
You may be surprised to learn that your next Internet search could affect your credit score.
Lenders use credit scores to assess whether they will give credit to consumers for homes, cars, education and many other aspects of life. Traditionally, the credit bureaus that provide these ratings have account on the borrowing history of consumers. Now, however, they are manufacturing use of new and varied “alternative data” sources.
The use of alternative data in credit reporting is both promising and perilous, according to a recent article by Sahiba Chopra, Vanderbilt law student at the time of publication. Chopra calls for reforms to the regulatory framework governing credit ratings to ensure fairness and equity in the use of alternative data.
Alternative data promises to expand access to loans for more than one in seven American adults who lack an established credit rating, Chopra maintains. These people, the majority of whom are black or Hispanic, are effectively locked out to apply for loans because they don’t have a borrowing history that credit bureaus can analyze.
But today, credit bureaus can use alternative data sources that go beyond borrowing history to assess whether these people will repay their loans. Sources of information can include consumer utility payments, education level or even internet browsing history.
While showing promise for expanding access to credit, using alternative data to calculate credit scores also raises several concerns, Chopra warns. The data can contain inaccuracies. Data collection can interfere in consumer privacy. And the complexity of the algorithms used to process the data too creates the potential for unintended discrimination based on factors such as race and gender.
Chopra views existing laws and regulations are insufficient to address these concerns.
Two laws govern credit scores. The first – the Fair Credit Reporting Act (FCRA)—imposed obligations imposed on individuals or companies that provide information for credit reports or that use such reports. CARF requires credit information providers to take steps to ensure its accuracy. This too requires that consumers receive notification whenever a business or individual takes adverse action against them based on their credit history, such as denying them a loan.
Chopra raises several concerns about the FCRA’s treatment of alternative data. The law imposed no requirement for the level of detail that adverse action notices must contain, which means that consumers may have no idea what data sources were considered in the decision to deny them credit. This too contains no limits on the types of information credit reporting agencies use to build their scores, raising privacy and fairness concerns when agencies incorporate data such as browsing history.
A second federal law, the Equal Credit Opportunity Act (ECOA) – also governs credit ratings and concentrates on preventing discrimination in lending and borrowing against ‘protected classes’ such as race, sex or religion. ECOA allow borrowers to sue lenders for intentional discrimination whenever a lender’s actions have a “disproportionately negative” discriminatory impact.
Chopra complaints that the ECOA fails to prevent discrimination in the age of alternative data because of the high hurdles it places on consumers seeking to prove that a lender has discriminated against them. Individuals already face difficulty in demonstrating that a company has acted in a discriminatory manner. Proving that an algorithm violates the ECOA is even more difficult, because consumers have little or no access to the underlying methodology used to grant or deny them access to credit.
To remedy these problems, several jurists have offers a new Model Credit Rating Fairness and Transparency Act (FaTCSA). FaTCSA look for address transparency issues by requiring credit reporting agencies to provide state attorneys general and the public with detailed explanations of their methodologies. Promoters hope this increased disclosure will encourage reporting agencies to comply with anti-discrimination requirements and increase the accuracy of their scores.
Chopra identifies several proposals that would improve the FaTCSA or other regulatory updates. New legislation or proposed regulations should enable consumers to trace data used in their credit report to its ultimate source, she added. argue. The law should also require lenders to set their credit standards and inform consumers of concrete steps they can take to improve their ratings. Also, Chopra favors prohibiting credit reporting agencies from using consumer browsing data as part of their credit score.
Chopra too offers several actions that regulators can take under their current authority. The Consumer Financial Protection Bureau, for example, could publish no-action letters to lenders appearing to use consumer data in a discriminatory manner. Such letters can state further use of this data on increased disclosures and compliance with anti-discrimination protections.
Also, Chopra argue that agencies could operate on the presumption that the use of alternative data in credit reports is discriminatory, shifting the burden to credit reporting agencies to prove compliance with the law.
Chopra highlighted the importance of a unified federal response to prevent regulatory fragmentation that will leave consumers in different states with different levels of protection.
Based on current trends, the use of alternative data in credit information only seems likely to Continue to augment. Chopra argues that Congress and federal regulators must work to ensure it increases access to credit while protecting consumer privacy.