The U.S Government Accountability Office Releases First Financial Technology Report

The United States Government of Accountability (GAO) has released its first report about financial technology (fintech) that advises agencies to provide a clearer picture on online lenders’ use of alternative data.

What is financial technology?

Fintech refers to the emerging industry that uses technology and innovation to provide financial products and services. The use of smartphones for mobile banking, investing services and cryptocurrency are examples of technologies aiming to make financial services more accessible to the general public.

Fintech lenders are usually referred to nonbank firms that operate online and may use alternative or nontraditional data to make loan decisions. An example of alternative data to determine borrower information includes education level, geographic location or online browsing history as compared to traditional data used such as credit scores.

GAO report findings:

The GAO report “(1) describes recent trends in fintech lending and (2) examines fintech lenders’ use of alternative data and the extent to which federal agencies monitor lenders’ use of the data.

The report states two recent trends seen in fintech companies:

• Growth. The loan volume for fintech lenders has grown and is expected to continue growing. Personal loans have grown sevenfold from 2013 through 2017 ($2.5 billion to $17.7 billion). The fintech lenders also reported growth in their small business and student loan portfolios.
• Bank partnerships. Fintech lenders are partnering with banks to originate loans. Generally, loan applicants are evaluated using the fintech lenders’ technology-based credit models, which incorporate the banks’ underwriting criteria. The fintech lenders then purchase the loans from the banks and sell them to investors or hold them on their balance sheets.

As fintech companies continue to use alternative data in credit decisions, it can have potential benefits such as the expansion of credit, as well as risks such as the potential for contrasting impact and other fair lending issues.

As a result, using alternative data could make loans available to more people, but could also have unintended effects. Fintech lenders may not know how to use the data and still comply with fair lending laws.

The Consumer Financial Protection Bureau (CFPB) and federal banking regulators have monitored fintech lenders’ use of alternative data by collecting information and developing reports, but they have not provided lenders and banks with specific guidance on using the data in underwriting.

What does GAO recommend?

The GAO report concluded by recommending that the CFPB and the federal banking regulators provide clearly written regulations to fintech lenders and banks that partner with fintech lenders, on the appropriate use of alternative data in the underwriting process.

With clear communication from CFPB and the federal banking regulators on the appropriate use of alternative data, fintech lenders would have greater certainty about their compliance with fair lending and other consumer protection laws, and federally regulated banks are better able to manage the risks associated with partnering with fintech lenders that use these data.