Alternative Data Has Upside Says Federal Regulator

Earlier this week, the Consumer Financial Protection Bureau (CFPB) announced the results of its No-Action Letter given to fintech company Upstart Network in late 2017. With the no-action policy, Upstart was able to show that alternative data can substantially increase access to credit for all consumers regardless of race, ethnicity, and sex.

The No-Action policy promises a lighter regulatory touch to innovative financial service companies. This specific policy allowed Upstart to use alternative data, including education and employment information, and machine learning in making credit underwriting and pricing decisions.

Upstart’s new underwriting model that utilized alternative data approved “27 percent more applicants than the traditional model, and yields 16 percent lower average APRs for approved loans.” The increase in access to credit and decrease in interest rates was true regardless of race, ethnicity, and sex.  

Also, Upstart found that its new underwriting model had the following results: 

• “Near prime” consumers with FICO scores from 620 to 660 are approved approximately twice as frequently. 
• Applicants under 25 years of age are 32 percent more likely to be approved.
• Consumers with incomes under $50,000 are 13 percent more likely to be approved.

“The concept of AI and alternative data in lending is enormously important and they [the CFPB] want to inform people of what progress has been made on that front,” said Dave Girouard, Upstart’s CEO and co-founder. The CFPB’s recent announcement “is just affirmation from the regulator [of] why they did this, what they’re seeing from it, and probably most importantly, that the use of alternative data and AI or machine learning is actually improving access to affordable credit.”