House revives effort to allow nontraditional data in credit scores

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WASHINGTON — House lawmakers are considering legislation to expand the data included in credit reports, despite warnings that certain types of alternative credit data items could hurt consumers.

At a hearing of the recently formed Financial Technology Task Force — an arm of the House Financial Services Committee — lawmakers, consumer advocates and industry experts discussed the bill to allow data such as rent and telecommunications payments to be added to credit reports.

“l personally believe that this is the future in the era of renting, and Venmo, and Uber, that we need to give the next generation of consumers the ability to build a stronger credit file through nontraditional data sources,” Rep. Josh Gottheimer, D-N.J., who sponsored the legislation, said at the hearing Thursday.

The legislation is similar to a bill proposed last Congress by former Rep. Keith Ellison, D-Minn., to include positive information now excluded from the traditional credit scoring system in order to help consumers particularly in lower-income households build a credit history. That bill passed the House in June 2018.

But consumer advocates have warned that the additional information could backfire for consumers who struggle to pay their bills, which could potentially damage their credit profiles.

“Some types of data and uses can be helpful, others can hurt,” Chi Chi Wu, a staff attorney at the National Consumer Law Center, said at the hearing. “We don’t want to penalize tenants who invoke their right to withhold rent over poor conditions. … Gas and electric utility data can be potentially harmful if added in the wrong way. … It has the potential to hurt tens of millions of consumers by adding new reports of 30- or 60-day-late payments.”

But Rep. Patrick McHenry of North Carolina, the top Republican on the House Financial Services Committee, said that he thinks the benefits of including additional data in consumers’ reports outweigh the risks.

“When you say that alternative data can be an enhancement and I understand all of the caveats … of course there are [risks],” McHenry said. “But when we are talking about getting unbanked or credit invisible people and making them visible, I think that is a proper societal tradeoff in order to get more people into the world of being banked.”

Dave Girouard, CEO of the artificial intelligence lending platform Upstart Network, said the company’s model can help improve access to affordable credit.

In prepared testimony, Girouard said Upstart’s model approves 27% more consumers for loans and lowers their interest rates by 3.57 percentage points compared to traditional lending models that use a FICO score. When the company received a "no-action" letter from the Consumer Financial Protection Bureau in September 2017, Girouard said, the federal agency was “recognizing that Upstart’s platform improves access to affordable credit without introducing unlawful bias.”

Wu suggested that lawmakers should give consumers control what alternative data is used in their credit reports, in order to prevent unintended harm.

“The consumer should be allowed the option of sharing it or not,” Wu said. “So if they want to share their bank account data, if they want to share their utility payment or rent payment data, they should be permitted to, but if they don’t want to, and they want to say ‘hands off my data,’ that also should be respected.”

The hearing comes as Congress is examining whether algorithms used by banks and fintech companies enable greater financial inclusion or can lead to discrimination.

Sens. Elizabeth Warren, D-Mass., and Doug Jones, D-Ala., pressed the heads of the Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and CFPB in June to ensure that the algorithms don’t result in discriminatory lending.

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Credit scores FCRA Alternative lending Customer data Artificial intelligence Racial Bias Patrick McHenry House Financial Services Committee