By Jonice Gray Tucker and Caroline M. Stapleton
Thinking of getting into a relationship with alternative data? You’re not alone. Use of “alternative data,” a term broadly used to describe consumer information gathered from non-conventional sources, is becoming increasingly attractive to mortgage lenders, their service providers, and even consumers who lack traditional evidence of creditworthiness. In recent years, there has been a dramatic increase in access to large volumes of consumer data, much of which is being mined from digital sources. On a parallel track, technological advances have enabled companies to rely on machine learning to interpret and then use data in sophisticated models, providing a path for more efficiently using such information in business analytics.
In connection with consumer lending, alternative data may present a mechanism for enhancing loan marketing, underwriting, and pricing as well as means for opening credit markets to consumers who may not have qualified for certain financial products or services if alternative data had not been considered. However, as illustrated by the government actions and private litigation that have impacted Facebook and certain other early users of alternative data within high-powered models, use of this information may be accompanied by significant legal and compliance risks, including the possibility of violating anti-discrimination laws and laws prohibiting unfair, deceptive or abusive acts and practices. These risks are pronounced in the financial services industry, as compared to other industries insofar as such companies are regulated by tighter legal structures.
Managing fair and responsible lending risk on this new frontier is anything but straightforward, particularly given that many seemingly neutral data points may, in fact, be proxies for a protected characteristic or membership within a class of consumers who may be especially vulnerable. For this reason, mortgage lenders thinking of leveraging alternative data first should carefully consider the potential implications on fair and responsible lending compliance, and take steps to mitigate the applicable risks. As we discuss below, relationship between lenders and alternative data can be complicated …
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Jonice Gray Tucker is a founding partner with Buckley LLP and a member of the firm’s governing board. Ms. Tucker specializes in work with banks, non-bank financial institutions, and other companies providing financial products and services. Ms. Tucker focuses a substantial portion of her practice on escalated supervision matters, investigations, and enforcement actions. She can be reached at jtucker@buckleyfirm.com.
Caroline M. Stapleton is counsel with Buckley LLP. Ms. Stapleton represents financial services providers in federal and state regulatory and enforcement matters. Her consumer lending practice includes advising clients on issues related to mortgages, home equity credit, credit cards, and student lending. She can be reached at cstapleton@buckleyfirm.com.
The post Alternative Data and Fair Lending Face Off: The Relationship is Complicated appeared first on Mortgage Compliance Magazine.
