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Experts: Alternative Data Sources Could Help Consumers Build Credit

The current risk-based pricing model for lending has allowed more consumers to qualify for credit, while alternative data sources could help consumers without traditional credit histories build credit, an industry representative said during a Wednesday (May 26) House subcommittee hearing on consumer credit reporting.

“The studies that have come out focused on risk-based pricing have shown that, if we abandon risk-based pricing, that will result in an overall increase in the price of credit, and a lessening of the availability of credit for consumers,” Rebecca Kuehn, partner at Hudson Cook on behalf of the Consumer Data Industry Association, said during the hearing. “Risk-based pricing has enabled more consumers to qualify for credit, even if traditionally they would have been declined. If we reverse this course, there will be fewer consumers who qualify for credit.”

If adverse information on credit reports would be suppressed, the cost and availability of credit would suffer, another industry representative said.

“The cost of credit would increase as lenders price … for the unknown, for the risk,” John Danaher, president, Consumer Interactive at TransUnion, said during the hearing. “And … I think there would be a contraction of credit. Lenders would be less willing to lend to marginal borrowers because they would … not have that insight into exactly how that borrower might perform.”

However, for consumers that don’t have a traditional credit history, Kuehn said alternative data sources serve as good history on which they can build to advance their credit goals.

During the hearing, U.S. Representative William Timmons of South Carolina addressed the “increasing patchwork framework of data privacy and security regulations at the state level across the U.S.” He asked industry representatives if they would prefer Congress to make one standard that covers the entire country.

“A nationwide standard would make it easier to figure out when consumers need to be notified in the event of a breach,” Kuehn responded. “But all of the consumer reporting agencies comply with federal standards for data security to ensure the security of information no matter where consumers are located.”

And, while some experts have called for the creation of a federal consumer credit reporting agency, Kuehn pointed out that such an entity would lack the impetus that the existing three large credit reporting bureaus have to find new solutions for individuals or grow access.

“A government-run credit bureau would not have the same incentives to find new solutions for consumers or expand access,” Kuehn said.

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