May 19, Re: Request for Information Regarding Use of Alternative Data and Modeling Techniques in the Credit Process, Docket No.

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1 May 19, 2017 Ms. Monica Jackson Office of the Executive Secretary Consumer Financial Protection Bureau 1700 G Street, NW Washington, DC Re: Request for Information Regarding Use of Alternative Data and Modeling Techniques in the Credit Process, Docket No. CFPB Dear Ms. Jackson: The U.S. Chamber of Commerce (the Chamber ) is the world s largest business federation, representing the interests of more than three million companies of every size, sector, and region. The Chamber created the Center for Capital Markets Competitiveness ( CCMC ) to promote a modern and effective regulatory structure for capital markets to fully function in a 21st century economy. CCMC appreciates the opportunity to submit this letter in connection with the Request for Information ( RFI ) regarding the use of alternative data and modeling techniques in the credit process. 1 We are pleased that the Consumer Financial Protection Bureau ( the Bureau ) has reached out to stakeholders and interested parties as it studies alternative data and modeling techniques. As the Bureau itself recognizes, 2 innovations in the use of alternative data and modeling techniques in the underwriting process have the potential to reduce costs, expand access to financial services, and enhance consumer convenience. We accordingly write to emphasize two points: 1 See Request for Information Regarding Use of Alternative Data and Modeling Techniques in the Credit Process, 82 Fed. Reg (Feb. 21, 2017). 2 Id. at

2 Alternative data and modeling techniques are promising innovations that can expand access to credit, while reducing costs, and enhancing consumer convenience. The Bureau should support and facilitate, not create artificial barriers to, innovation in the use of alternative data and modeling techniques by eliminating regulatory uncertainty that limits the adoption of these tools. Regulatory uncertainty coupled with the lack of adequate legal assurances to protect innovative companies continue to limit the creation and adoption of these tools. As a result, the potential benefit to consumers and particularly those consumers who have struggled to qualify for traditional consumer financial products or services is not currently being realized. We believe that the Bureau has an important opportunity to facilitate innovations that will substantially benefit consumers. Nonetheless, as was seen at the Bureau s recent field hearing on the topic, there are a variety of issues that will need to be carefully navigated to ensure that these tools can be used in a way that does not expose businesses to prohibitive compliance risks. If the Bureau establishes policies encouraging these types of valuable innovations, we hope the Bureau will extend a corresponding assurance to institutions there will not be forthcoming reactive enforcement actions against businesses that choose to employ them. The Bureau instead should collaborate with stakeholders to identify and remove regulatory impediments to the adoption of tools that will benefit consumers, while also keeping consumer protections intact. In this vein, we look forward to collaborating with the Bureau both as it gathers information regarding the use of alternative data and modeling techniques and as it paves a way forward. Discussion (1) Alternative Data and Modeling Techniques Are Promising Innovations that Can Expand Access to Credit While Reducing Costs and Enhancing Consumer Convenience. Consumer credit long has been a key pillar supporting Americans pursuit of their dreams, and is an essential component of our national economy. Whether a mortgage for a first home, auto financing to help get to work, or a student loan to pursue new professional opportunities, access to credit allows consumers to unleash their potential and build long-term financial stability. In doing so, consumers can build positive credit histories, enabling them to create a track record of repayment ability that allows them to acquire future loans that are cheaper and with better terms. 2

3 Underwriting standards and applicable regulations require, however, that creditors base their decisions whether to extend credit on certain limited data. As a result, a consumer who lacks these particular financial records may well be unable to secure access to the credit he or she is seeking, even though he or she might be a credit-worthy borrower. This can lead to Americans lacking access to mainstream financial services and, as a result, a loss of personal and professional opportunities for them and their families. Indeed, the Bureau estimates that approximately 45 million Americans lack access to mainstream credit because they have no credit history or because their credit history is insufficient or stale. 3 This credit invisible population is approximately 15 percent of our country, which ultimately hinders both their financial and our economy s growth. We support innovations that allow financial services companies to support consumers as they move into the financial mainstream. The use of alternative data and modeling techniques is one such opportunity; a view that is widely shared among a broad range of stakeholders in the consumer financial services marketplace. Increased access to mainstream consumer financial services benefits those consumers, both immediately through access to particular products and in the long term through the development of a positive credit history. Moreover, such innovations can have additional benefits such as more efficient underwriting decisions, and allowing lenders to extend credit at lower rates, which thereby directly benefits consumers. We appreciate the Bureau s interest in these innovations. Supporting innovations that benefit consumers is, after all, a key statutory objective of the Bureau, 4 as is ensuring that consumers have access to financial products or services. 5 At the same time, we of course appreciate that the Bureau has the responsibility for ensuring that the use of these tools does not create inappropriate tension with existing regulatory frameworks. As discussed in more detail below, we ask the Bureau to help alleviate such tensions so that the full potential of these innovative tools can be realized. The marketplace certainly is off to a strong start and industry stakeholders have begun incorporating various streams of alternative data into their decision-making processes. Rental and educational data already are being featured in various businesses credit determinations, for example, and other lenders are using transaction histories from non-credit products that they offer to inform credit models. At the 3 82 Fed. Reg. at See 12 U.S.C. 5511(b)(5) (providing that it is an objective of the Bureau to ensure that markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation ). 5 See id. 5511(a) (providing that it is an objective of the Bureau to ensure that that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive ). 3

4 same time, lenders and sources of such alternative data are increasingly building the relevant relationships that will support increased availability and ultimately use of alternative data. (2) The Bureau Should Support and Facilitate, not Create Artificial Barriers to, Innovation in the Use of Alternative Data and Modeling Techniques by Eliminating Regulatory Uncertainty that Limits Adoption of These Tools. a. The Bureau Should Encourage, not Direct, Innovation. We appreciate that the Bureau is attuned to the potential benefits of expanding access to credit through the use of alternative data and modeling techniques. To facilitate this expansion, we believe that the Bureau must work closely with industry and other stakeholders to drive innovation and balance the risks and benefits inherent in a changing, innovative marketplace. We view this RFI as an important first step in an ongoing collaboration. In this vein, we would offer some general observations in keeping with our belief that the Bureau should support innovation in this area. First, as the Bureau considers how best to facilitate innovation in the use of alternative data and modeling techniques, it should bear in mind that technological innovation has flourished in this country in large part because of limited government involvement and the absence of governmental directives mandating the path such ingenuity should follow. In contrast, an interventionist posture as to how innovators should develop alternative approaches to credit analysis would stifle innovation and thereby reduce the consumer benefits and increased credit access that the Bureau has rightly concluded are possible with alternative data and modeling techniques. We believe it far wiser to allow innovations in credit analysis to emerge naturally than to restrict innovation based on the Bureau s predictions of how the market should develop. Indeed, it is as a result of industry innovation that alternative data and modeling techniques have developed and show such promise today. Moreover, the Bureau should commit itself to technological and data point neutrality and not prejudge important questions that will be decided by the quality of innovations and the response of the marketplace. The financial services marketplace is fast-moving and innovative, with its future driven by yet-unknown technological and economic developments. The Dodd-Frank Act empowers the Bureau to facilitate that innovation by ensuring that the marketplace operates transparently and efficiently. 6 As such, it grants the Bureau substantial authority to set and enforce the rules of the road (as well as to educate consumers about those rules), but presumes that competition and innovation will do the rest. Accordingly, rather than seeking to 6 See supra n. 4. 4

5 determine the course of originality in the financial services marketplace, the Bureau should focus on providing an even playing field: a fair, transparent regulatory environment in which innovation in the use of alternative data and modeling techniques can flourish. Technological neutrality is particularly important in the context of alternative data and modeling techniques due to the consequential questions raised by the sheer variety of data sources, consumer needs, and financial products involved. A regulator might assume what lies ahead, but should not gamble with the future by presuming to guess what will be best for consumers in the long run. To realize the full potential of these innovations, the Bureau must continue to remain neutral, to seek information, and to collaborate closely with industry and other stakeholders. The Bureau certainly should not pick technological winners and losers, direct or prohibit particular forms of innovation, or cast a shadow of regulatory uncertainty over emerging technologies. Doing so would harm consumers by chilling innovation and thereby defeating our shared goals of cost reduction, expanded access to financial services, and enhanced convenience. b. The Bureau Should Facilitate Innovation by Reducing Regulatory Uncertainty. The Bureau should also support innovation by providing regulatory guidance regarding compliance with existing laws. Appropriate regulatory guidance can encourage innovation by providing the conditions in which innovators can thrive. Progressive leaps forward (and fair competition on a level playing field) are most possible when there are clear rules for the marketplace and risk-taking is incentivized, whereas innovation is stifled by overly prescriptive rules or regulatory uncertainty. We would urge the Bureau to partner with industry stakeholders to unleash the innovative potential of alternative data. We recognize that the Bureau does not want to encourage irresponsible innovation, and neither would our compliance-minded members. But we believe that the Bureau can pursue creative approaches that will allow responsible companies that work hard to comply with all relevant regulatory requirements to harness the benefits of alternative data. In this way, the Bureau can be a true partner to industry as it works to expand financial inclusion through innovative tools. Rather than punishing companies that have worked hard to comply with the law in gotcha enforcement actions, we ask the Bureau to work through any relevant issues collaboratively with such companies. Indeed, offering appropriate regulatory guidance will enhance compliance, help consumers, and encourage innovation and competition. For these reasons, we urge the Bureau to consider three key points. 5

6 First, the costs of legal uncertainty in this context are already being felt. As we have explained in prior conversations with the Bureau, regulatory uncertainty is a major drag upon consumer financial services markets and, in turn, the overall economy. Such legal gray areas create market uncertainty that keeps risk-adverse institutions away from valuable innovations, ultimately stifling competition, and increases compliance costs, which ultimately raises prices to consumers. In contrast, when regulatory expectations are clear, institutions feel confident they are in compliance and are more comfortable pursuing innovative projects that benefit consumers by expanding access to credit at lower costs. Regulators also benefit because legal certainty allows them to focus their enforcement and supervisory efforts on bad actors, not well-meaning companies which are understandably confused by unclear legal requirements. Today, the regulatory uncertainty around alternative data is very real. Chamber members engaged in alternative data analysis reported that this data is undersupplied due to the legal uncertainty and fear of going down a path that could unknowingly lead to an enforcement action. Likewise, even companies that do gather such data hesitate to use it, including using it with other data sources that inform credit decisions. Second, the Bureau should use its full tool kit to enhance regulatory certainty in this area including the no-action letter policy and Project Catalyst. The Bureau could use its no-action letter process to explain its views on specific fact patterns that may be of substantial interest to a wide range of industry participants. Indeed, given the variety and complexity of alternative data and modeling techniques available, the demand for regulatory clarity here strongly supports the Bureau relaxing the requirements for no-action letters and expanding that process to also allow for advisory opinions. 7 If the Bureau chooses to use the no-action policy in this manner, we ask the Bureau to strengthen the protections for companies availing themselves of the process, including liability protections. Only then will companies feel completely comfortable pursuing the no-action letter process. The lack of current protections is likely why the Bureau has not yet granted a single no-action letter. This type of clarity is a successful tool used at other banking regulators and we hope the Bureau will learn from their models and establish a similar process, which would be well-suited to vet innovative initiatives. Moreover, the Bureau could support the pursuit of various pilot programs, allowing companies to create innovative product offerings in a controlled manner that 7 We have previously written to the Bureau urging it to limit the restrictions on its no-action letter process as well as to issue advisory opinions in keeping with the approaches adopted by fellow regulators. For example, see Letter from Jess Sharp to Dan Quan, (Dec. 15, 2014). 6

7 allows the capture of lessons learned for the Bureau and other businesses. The United Kingdom s Financial Conduct Authority has a regulatory sandbox that could serve as a model for the Bureau on how to approach innovative initiatives. However, we ask that the Bureau not use such tools to impose de facto regulatory standards without appropriate notice and comment, nor should it provide guidance in a manner that advantages some companies over others. Still, the Bureau has substantial ability to clarify its position on the application of relevant laws and regulations to alternative data and modeling techniques. Used well, these tools will allow the Bureau to ensure that market participants have a consistent understanding of applicable laws and that no undue regulatory uncertainty slows down adoption of innovative approaches that benefit consumers. Third, the Bureau should recognize that providing regulatory certainty is not merely a challenge to anticipate the future. The need is immediate as is the Bureau s opportunity to make a positive impact for consumers. Thus, the Bureau does not need to answer every complex question in this field to achieve positive results for consumers. Consider, for example, three areas where regulatory clarity could have substantial and immediate benefits: Fair Credit Reporting Act The successful use of alternative data will in large part depend upon data availability. This, in turn, will depend on the regulatory burdens that attach to entities that provide such alternative data. The Bureau should be careful not to disincentivize companies from producing alternative data either by setting compliance standards too high, or by allowing regulatory uncertainty to persist. To that end, the Bureau should consider how the regulatory framework imposed under the Fair Credit Reporting Act could apply to entities that provide alternative data to credit reporting agencies and/or lenders. Landlords, utilities, or other entities that provide that information may well not be able or willing to take on the regulatory burdens imposed on furnishers under that statute, and we would urge the Bureau to think creatively about how it can encourage companies to produce such information consistent with the requirements of that statute and its implementing rules. Moreover, with respect to available data, the Bureau should ensure that the regulatory burden associated with using such alternative data does not discourage lenders from incorporating it into credit decisions. For example, the Bureau should consider the application in this context of the statutory requirement that lenders provide contact information for the consumer reporting company that supplied credit reporting data used in adverse lending decisions. Because credit scores based on alternative data come from multiple sources, it may be very difficult for lenders to communicate to consumers the principal reasons for taking adverse action. As a 7

8 result, the Bureau should consider providing guidance to lenders on how best to route consumers to the appropriate data source. Alternative Data Points We ask for the Bureau to issue guidance on what data points may be considered without a lender being subjected to fair lending risk. While information about an applicant s educational status can be highly valuable in credit determinations, institutions will not feel confident using such a data point without guidance from the Bureau that this data point and others will not raise fair lending concerns and make that institution a target for a fair lending enforcement action. Financial institutions already invest substantial amounts in compliance systems, as well as on legal analysis of compliance risks associated with using possible data streams in making credit decisions. But unless the Bureau provides some clarity, substantial uncertainty is bound to persist and institutions will not utilize the potentially predictive data points if there is any concern there might be a fair lending or other compliance violation. As a result, companies are likely to have less information upon which they can base their lending decisions, making it harder to extend credit to applicants who might qualify if a fuller picture were available. Here, as with other categories of third-party data, the Bureau should explain what information it believes may be used in credit determinations and ensure compliance-minded institutions will not be faulted for using this data. Internal Information Many creditors also have access to significant information about a consumer s use of other non-credit products. A credit card issuer may have records of an applicant s prior, successful use of a prepaid card, for example, or of an applicant s completion of financial education programs provided by the company. We believe that there are no substantial regulatory impediments to using such data in lending decisions. However, we understand that creditors have at times hesitated to use such information in light of the lack of substantial regulatory guidance on the topic. We accordingly would urge the Bureau to address this issue going forward and, more generally, to foster an open dialogue with industry stakeholders about the data they may confidently use in lending decisions. 8

9 We thank you for the opportunity to submit these comments and would be happy to discuss these issues further. Sincerely, Tom Quaadman 9