The CFPB issued a blog post noting the potential inclusion benefits of using AI and machine learning models for credit underwriting, as well as risks and compliance challenges with respect to the delivery of “adverse action” disclosures. The agency emphasized the “built-in flexibility” in the regulatory framework and recognized emerging work by lenders and technology companies to enhance the explainability of AI underwriting models.
FinRegLab in the News
Study Suggests Cash Flow Data Does Not Discriminate in Lending Decisions
www.spglobal.com
“Cash flow data can predict the credit risk that individual borrowers pose without discriminating against protected groups, according to recent research.”
“Roughly a fifth of U.S. consumers lack credit history data, she says, which focuses on certain types of credit and expenses. The data is also a lagging indicator since it’s focused on the customer’s financial history.”
The CFPB has issued FAQs on implementation of CARES Act requirements concerning pandemic-related credit reporting, as well as the use of special comment codes for disaster effects and forbearances.
“cash-flow data – such as records of transactions in and out of consumers’ deposit and card accounts – can improve risk prediction because it evidences how applicants manage their finances.”
FinRegLab in the News
How to Protect Your Credit Score During the Coronavirus Pandemic
www.consumerreports.org
“Many companies report to credit bureaus in batches, she says, and accounts that are 30 days delinquent typically get reported about a month after the bills were due. That means that many payments missed in the early phases of the COVID-19 crisis are likely to hit the credit agencies very soon.”
The CFPB issued a no-action letter template to the Bank Policy Institute recognizing terms for a standardized, small-dollar credit product, including those designed to function as “guardrails.” The template is intended to ease approval of plans by individual regulated entities to offer a product based on these standardized terms, subject to submission and approval of further information specific to each lender. Underwriting based on the applicant’s cash-flow data is specified among the essential terms set forth for the standardized product.
U.S. prudential regulators recognize the roles that both innovative technologies and data sources such as deposit account activity can play in providing responsible small-
dollar loans to consumers and small businesses who do not meet supervised institutions’ traditional underwriting standards.
Resolving data transfer issues could facilitate use of cash-flow data, with particular opportunity to expand access to credit for millions of underserved consumers and small businesses
“A shift in people’s creditworthiness ranking has been happening all over the world. We need to make sure the change’s innovative impact is a financially inclusive and anti-discriminatory one.”