Data is revolutionizing credit scoring

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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 extend credit to consumers for homes, cars, education, and many other aspects of life. Traditionally, the credit bureaus that establish these scores have relied on the borrowing history of consumers. Today, however, they are using new and varied “alternative data” sources.

The use of alternative data in credit reports is both promising and perilous, according to a recent article by Sahiba Chopra, a student at Vanderbilt Law School 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 loan access for more than one in seven American adults who don’t have an established credit score, Chopra argues. These people, the majority of whom are black or Hispanic, are effectively barred from applying for loans because they have no previous borrowing history that credit reporting agencies 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 consumers’ utility payments, education level, or even Internet browsing history.

While it holds promise for expanding access to credit, using alternative data to calculate credit scores also raises several concerns, warns Chopra. The data may contain inaccuracies. Data collection can infringe consumer privacy. And the complexity of the algorithms used to process the data also creates the potential for unintended discrimination based on factors such as race and gender.

Chopra considers existing laws and regulations insufficient to address these concerns.

Two laws govern credit scores. The first, the Fair Credit Reporting Act (FCRA), imposes obligations on individuals or companies who provide information for credit reports or who use these reports. The FCRA requires providers of credit information to take steps to ensure its accuracy. It also requires consumers to be notified 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 does not impose any requirements on the level of detail that adverse action notices must contain, which means that consumers may have no idea of ​​the sources of data taken into account in the decision to deny them credit. It also contains no limits on the types of information credit reporting agencies use to build their scores, which raises 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 scores and focuses on preventing discrimination in lending and borrowing against “protected classes” such as race, sex or religion. The ECOA allows borrowers to sue lenders for intentional discrimination whenever a lender’s actions cause a “disproportionately negative” discriminatory impact.

Chopra says 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 struggle to demonstrate that a company has acted in a discriminatory manner. Proving that an algorithm violates the ECOA is even more difficult, as consumers have little or no access to the underlying methodology used to grant or deny them access to credit.

To address these issues, several jurists have proposed a new Model Credit Rating Fairness and Transparency Act (FaTCSA). FaTCSA seeks to address transparency issues by requiring credit reporting agencies to provide state attorneys general and the public with detailed explanations of their methodologies. Proponents hope increased disclosure will spur rating agencies to comply with anti-discrimination requirements and increase the accuracy of their scores.

Chopra identifies several proposals that would improve FaTCSA or other regulatory updates. New legislation or proposed regulations should allow consumers to trace the data used in their credit report to its ultimate source, she argues. The law should also require lenders to set their credit standards and inform consumers of concrete steps they can take to improve their ratings. Additionally, Chopra supports banning credit reporting agencies from using consumer browsing data as part of their credit score.

Chopra also suggests several actions regulators can take under their current authority. The Consumer Financial Protection Bureau, for example, could send no-action letters to lenders that appear to be using consumer data in a discriminatory way. These letters may condition further use of this data on increased disclosure and compliance with anti-discrimination protections.

Further, Chopra argues that agencies could operate on the presumption that using alternative data in credit reports is discriminatory, shifting the burden to credit reporting agencies to prove compliance with the law.

Chopra stresses 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 reports looks set to continue to increase. Chopra argues that Congress and federal regulators must work to ensure it increases access to credit while protecting consumer privacy.

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