[House Hearing, 116 Congress] [From the U.S. Government Publishing Office] EXAMINING THE USE OF ALTERNATIVE DATA IN UNDERWRITING AND CREDIT SCORING TO EXPAND ACCESS TO CREDIT ======================================================================= HEARING BEFORE THE TASK FORCE ON FINANCIAL TECHNOLOGY OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED SIXTEENTH CONGRESS FIRST SESSION __________ JULY 25, 2019 __________ Printed for the use of the Committee on Financial Services Serial No. 116-42 [GRAPHIC IS NOT AVAILABLE IN TIFF FORMAT] __________ U.S. GOVERNMENT PUBLISHING OFFICE 40-160 PDF WASHINGTON : 2020 -------------------------------------------------------------------------------------- HOUSE COMMITTEE ON FINANCIAL SERVICES MAXINE WATERS, California, Chairwoman CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina, NYDIA M. VELAZQUEZ, New York Ranking Member BRAD SHERMAN, California PETER T. KING, New York GREGORY W. MEEKS, New York FRANK D. LUCAS, Oklahoma WM. LACY CLAY, Missouri BILL POSEY, Florida DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri AL GREEN, Texas BILL HUIZENGA, Michigan EMANUEL CLEAVER, Missouri SEAN P. DUFFY, Wisconsin ED PERLMUTTER, Colorado STEVE STIVERS, Ohio JIM A. HIMES, Connecticut ANN WAGNER, Missouri BILL FOSTER, Illinois ANDY BARR, Kentucky JOYCE BEATTY, Ohio SCOTT TIPTON, Colorado DENNY HECK, Washington ROGER WILLIAMS, Texas JUAN VARGAS, California FRENCH HILL, Arkansas JOSH GOTTHEIMER, New Jersey TOM EMMER, Minnesota VICENTE GONZALEZ, Texas LEE M. ZELDIN, New York AL LAWSON, Florida BARRY LOUDERMILK, Georgia MICHAEL SAN NICOLAS, Guam ALEXANDER X. MOONEY, West Virginia RASHIDA TLAIB, Michigan WARREN DAVIDSON, Ohio KATIE PORTER, California TED BUDD, North Carolina CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio BEN McADAMS, Utah JOHN ROSE, Tennessee ALEXANDRIA OCASIO-CORTEZ, New York BRYAN STEIL, Wisconsin JENNIFER WEXTON, Virginia LANCE GOODEN, Texas STEPHEN F. LYNCH, Massachusetts DENVER RIGGLEMAN, Virginia TULSI GABBARD, Hawaii ALMA ADAMS, North Carolina MADELEINE DEAN, Pennsylvania JESUS ``CHUY'' GARCIA, Illinois SYLVIA GARCIA, Texas DEAN PHILLIPS, Minnesota Charla Ouertatani, Staff Director TASK FORCE ON FINANCIAL TECHNOLOGY STEPHEN F. LYNCH, Massachusetts, Chairman DAVID SCOTT, Georgia FRENCH HILL, Arkansas, Ranking JOSH GOTTHEIMER, New Jersey Member AL LAWSON, Florida BLAINE LUETKEMEYER, Missouri CINDY AXNE, Iowa TOM EMMER, Minnesota BEN McADAMS, Utah WARREN DAVIDSON, Ohio JENNIFER WEXTON, Virginia BRYAN STEIL, Wisconsin C O N T E N T S ---------- Page Hearing held on: July 25, 2019................................................ 1 Appendix: July 25, 2019................................................ 41 WITNESSES Thursday, July 25, 2019 Evans, Lawrance L., Managing Director, Financial Markets and Community Investment, U.S. Government Accountability Office (GAO).......................................................... 10 Girouard, Dave, CEO and Co-Founder, Upstart Network, Inc......... 11 Johnson, Kristin N., McGlinchey Stafford Professor of Law, Tulane University Law School.......................................... 8 Rieke, Aaron, Managing Director, Upturn.......................... 6 Wu, Chi Chi, Staff Attorney, National Consumer Law Center (NCLC). 5 APPENDIX Prepared statements: Evans, Lawrance L............................................ 42 Girouard, Dave,.............................................. 54 Johnson, Kristin N........................................... 57 Rieke, Aaron................................................. 74 Wu, Chi Chi.................................................. 80 Additional Material Submitted for the Record Lynch, Hon. Stephen F.: Written statement of the Cato Institute's Center for Monetary and Financial Alternatives................................. 96 Domino: A Blog About Student Debt............................ 99 Written statement of the Financial Data and Technology Association of North America (FDATA North America)......... 102 Written statement of FICO.................................... 105 Written statement of VantageScore............................ 107 McHenry, Hon. Patrick: Written statement of the Cato Institute's Center for Monetary and Financial Alternatives................................. 111 EXAMINING THE USE OF ALTERNATIVE DATA IN UNDERWRITING AND CREDIT SCORING TO EXPAND ACCESS TO CREDIT ---------- Thursday, July 25, 2019 U.S. House of Representatives, Task Force on Financial Technology, Committee on Financial Services, Washington, D.C. The task force met, pursuant to notice, at 10:02 a.m., in room 2128, Rayburn House Office Building, Hon. Stephen F. Lynch [chairman of the task force] presiding. Members present: Representatives Lynch, Scott, Gottheimer, Lawson, Axne, McAdams, Wexton; Hill, Luetkemeyer, Emmer, Davidson, and Steil. Ex officio present: Representative McHenry. Also present: Representatives Green, Himes, Porter; Gonzalez of Ohio, and Hollingsworth. Chairman Lynch. Good morning. The Task Force on Financial Technology will come to order. Without objection, the Chair is authorized to declare a recess of the task force at any time. Also, without objection, members of the full Financial Services Committee who are not members of this task force are authorized to participate in today's hearing consistent with the committee's practice. Today's hearing is entitled, ``Examining the Use of Alternative Data in Underwriting and Credit Scoring to Expand Access to Credit.'' I now recognize myself for 4 minutes to give an opening statement. I want to thank everyone for being here at our second Financial Technology Task Force hearing. Today's hearing will focus on the use of alternative data, the financial and nonfinancial data that is not traditionally used by national consumer reporting agencies in credit underwriting. With an estimated 26 million consumers lacking in any credit history, and another 19 million with an outdated or short credit history, lenders have looked to other means of assessing the creditworthiness of applicants. As a result, alternative data has become a hot topic. It has the potential to expand credit access but also raises concerns over the nature and sources of its data points. There is also significant regulatory uncertainty surrounding its use. Today, we will hear testimony and discuss questions on all of these issues. The promise of fintech lending has been to lower costs and bring new consumers into the market. This promise has been fueled by data points outside of the traditional factors used by underwriters like payment history and credit utilization. Today, lenders use an array of financial and nonfinancial data in their decision-making. Some factors, such as utility bill or rent payments, resemble traditional factors. Others, such as living in public housing, who your friends are, and what their credit scores are, your ZIP Code, your reading choices, educational attainment, educational institutions, and driving habits or online shopping habits, are a significant departure from traditional factors. We know that Facebook has up to 52,000 data points on each of its 2.7 billion daily users, and they sell access to that data to its advertisers. Use of this and other data can potentially help 45 million Americans who might have trouble accessing credit with traditional factors alone. Take for instance, a 28-year-old woman in a modest-paying job, or maybe with 2 very modest paying jobs, who has never had a credit card or taken out a personal loan or mortgage loan. She might find herself denied access to credit based on traditional factors, even though she is working 12 hours a day. But a lender using alternative data might take into account that she went to a reputable school, had a job with a reputable employer, and always pays her rent and utility bills on time. In that case, they might approve her application for credit. It is very likely we have one or two staffers working here on Capitol Hill who fit that exact description. However, it is not hard to imagine a similar scenario with much different results. Say, a young man with a decent but short credit history might be right on the cusp of being deemed creditworthy by traditional factors. However, a lender using alternative data sees in his rental history that he moves frequently, moves around a lot. In the last few years, he has had several domiciles. They may also see he doesn't have a college degree and that his Facebook friends have below average credit scores. So, they deny him access to credit. Unfortunately, this probably describes a number of our military personnel as they repeatedly move domiciles as a result of multiple redeployments during their careers. Without question, there are instances when using alternative data in credit underwriting has potential positive impacts. However, right now, oversight of its use is either highly fragmented or completely nonexistent, leading to uncertainty for lenders and potential harm for consumers. That is why we are here today, to better understand how to harness the benefits and mitigate the harms of using alternative data. I look forward to the testimony of our witnesses and the discussion of our Members. With that, I now recognize the ranking member of the task force, the gentleman from Arkansas, Mr. Hill, for 5 minutes for an opening statement. Mr. Hill. I thank the chairman. I appreciate you convening this hearing and I appreciate our witnesses appearing today. We are grateful for your advice and counsel today. Analyzing the use of alternative data in the marketplace lending industry is an important sector within our broader study of the fintech ecosystem. I am pleased that we were able to bring everybody together and do a deeper dive on this topic. Marketplace or fintech lenders are categorized through their digital or online focus and have recently emerged and grown quite a bit over the last decade. According to S&P Global, marketplace lending grew by 30 percent in 2017. They provide unsecured credit to individuals and working capital to small businesses. They have unique funding models with financing provided by investors, credit facilities, securitization, and, of course, balance sheet cash. Typically, these lenders currently lend through two primary models: a bank partnership model, in which a bank originates the loan, which is generally sourced and served by the marketplace lender; or a direct lender model, in which a marketplace lender acquires the applicable regulatory licensing in all of the States of our country. To help determine a borrower's creditworthiness, marketplace lenders often use some form of alternative data, hence the topic today. Traditional lenders typically have used FICO scores, 3 years of tax returns, payment history for credit cards, mortgages, or student loans in order to establish a risk profile for their borrowers. However, marketplace lenders robustly combine FICO scores with alternative data points to better gauge a borrower's character and economic situation. Examples of these data points include education level, employment status, utility and rent payments, et cetera. Analyzing these data points has the potential to widen the universe of borrowers and provide greater access to affordable credit. Importantly, a report by TransUnion outlined that lenders that utilized alternative data were able to lend to an additional 66 percent of borrowers in current markets and 56 percent in new markets. Today, we will explore concerns about how alternative data can best comply with critical fair lending requirements, which will be discussed in more depth. However, I do want to remind my colleagues that we don't want overregulation to stifle innovation and prevent the American consumer from now being able to access affordable credit through this new methodology. As to compliance obligations, obviously, I want to highlight some of the ongoing issues that have been evolving within the marketplace lending industry. The Treasury report-- which I regularly reference in these hearings--released a year ago now, provides a comprehensive review of the fintech sector. It has a robust analysis of this industry. It generally favors innovation, but identified certain important policies that need to be highlighted and discussed today, such as codify the valid-when-made doctrine, codify the role of the bank as the true lender of a loan that is made, allowing the testing of new credit models and data sources for financial institutions, and think through this issue of special charters or harmonization of this process across our States. The report also mentioned the third-party lender guidance. I know the FDIC and the OCC have been focused on this due to the rise of marketplace lenders and strong bank partnerships. As a former community banker, I well understand the compliance responsibilities around vendor partner, due diligence, onboarding of new partnerships, and board of director reviews. Also, as a result, as a banker, I understand the importance of banks maintaining a robust level of safety and soundness and constantly facing changing technology but assuring a vigor in compliance on both data security and privacy. I look forward to hearing the thoughts of the panel today, and over the years, I think this is going to be a fascinating way for Mr. Lynch and I to make recommendations to our full Financial Services Committee on how we can broaden marketplace lending. So, with that, I would like to yield the balance of my time to my friend, the ranking member of the Full Committee, Mr. McHenry of North Carolina. Mr. McHenry. Thank you. And, look, technology is creating new pathways for more consumers to access the financial system. That is a good thing. We are talking about people who are otherwise credit invisible or lack enough credit history to finance things like a mortgage, credit cards, or other loans. Alternative data draws on nontraditional sources of financial history, including bill payment history in areas like mobile phones, that are now essential ingredients, with 81 percent of Americans owning a smartphone at this point or using a smartphone, and rent. And by harvesting this type of data about the consumer, lenders have a more holistic picture about the consumer to whom they are lending. Yet, this new era is not without its challenges. We need to ensure that alternative data remains nondiscriminatory and that consumer data and privacy are protected. So, it is our job to ensure responsible innovation continues to be a driving force of the American economy, but in particular, in financial services. I yield back. Chairman Lynch. The gentleman yields back. The Chair now recognizes the gentleman from Georgia, Mr. Scott, for 1 minute for an opening statement. Mr. Scott. Thank you very much, Chairman Lynch, and let me commend you and Mr. Hill for providing this excellent bipartisan leadership on what I refer to as the thrilling new frontier. We are in a situation now where technology is moving at such a rapid pace, and where we need to look at where we need to adjust the sails and make sure everybody has an opportunity to be able to participate in this. And, of course, as we look at this scoring technology, we look at how it is impacting our financial system. There is no group that needs our help more than the 26 million Americans who have no credit history. There are also 19 million Americans who have a very limited credit history. And when you put the totality of the unbanked and the underbanked in there, we can see that we must not leave these parts of our population behind. So, I am looking forward to this, to making sure that we determine effectively how data is used in lending decisions and credit scoring, so all the American people can participate in this glorious new frontier. Thank you, Mr. Chairman. Chairman Lynch. I thank the gentleman. On behalf of this bipartisan task force, I want to welcome our distinguished panel. I would like to welcome the testimony of: Chi Chi Wu, a staff attorney with the National Consumer Law Center, based in Boston, my hometown; Aaron Rieke, managing director at Upturn, which is a nonprofit focused on promoting equity and digital technology through research and advocacy; Kristin Johnson, McGlinchey Stafford Professor of Law at Tulane University Law School; Lawrance Evans, Managing Director of Financial Markets and Community Investment at the Government Accountability Office; and Dave Girouard, founder and CEO at Upstart, which is a fintech lender focused on direct-to-consumer loans. Witnesses are reminded that your oral testimony will be limited to 5 minutes. And without objection, your written statements will be made a part of the record. Ms. Wu, you are now recognized for 5 minutes to give an oral presentation of your testimony. STATEMENT OF CHI CHI WU, STAFF ATTORNEY, NATIONAL CONSUMER LAW CENTER (NCLC) Ms. Wu. Mr. Chairman, Ranking Member Hill, and members of the task force, thank you for inviting me to testify today. I am testifying on behalf of the low-income clients of the National Consumer Law Center. We have heard several times today that there are tens of millions of consumers who are credit invisible. The topic of this hearing, alternative data, is often promoted as the solution. The thing is, alternative data includes lots of different types of data used in lots of different ways. Some types of data and uses can be helpful; others can hurt. As we say, the devil is in the details. The number one consideration for alternative data should be consumer choice. That should be the touchstone for all data collection. Now, we have heard with respect to the Equifax data breach a repeated complaint: Hey, none of us gave Equifax permission to collect our data. Let's get this right with respect to alternative data. Let's make sure it is the consumer's choice, that consumers make knowing and affirmative decisions to allow the use of this data, and the data is only used in the ways that consumers give permission for and expect. Another consideration for alternative data is whether it is used to create second-chance scores for just credit-invisible consumers or whether it is dumped wholesale into traditional credit reports where it might damage the records of consumers who already have a score. We want to give credit-invisible consumers a chance to be seen without hurting any of the nearly 200 million consumers who are already visible. As for types of data, bank account transaction data has shown a lot of promise, but it is also a juicy target. Debt collectors would love to get ahold of it. And bank account data can include sensitive information, such as where a consumer shops. There should be appropriate guardrails for sharing bank account data. Rent payment information is another type of data looks promising, specifically when no additional late payments are reported. But we don't want to penalize tenants who invoke their rights to withhold rent over poor conditions. Payday loan information, in contrast, is probably harmful. It is designed to lead to a cycle of debt, and just reporting it can hurt a consumer. And it is probably not necessary because most payday borrowers actually have credit records. Gas and electric utility data can be potentially harmful if added in the wrong way. If reported monthly without giving consumers a choice, it has the potential to hurt tens of millions of low-income consumers by adding new reports of 30- or 60-day late payments. In contrast, efforts to include utility data on a voluntary basis could be useful, and new voluntary products show there is no need for utility credit reporting where the consumer has no choice. And then, of course, there is Big Data--things like social media profiles, web browsing history, and behavioral data. There are a lot of unanswered questions about the predictiveness and the accuracy of Big Data. Some of it is also troubling because it strongly reinforces inequality. For example, education, that is, what kind of degree a consumer has, is highly correlated with the income and education of one's parents. And using social media profiles, particularly friend networks, raises concerns about racial disparities, given who most people's friends and families are likely to be. Speaking of racial disparities, we know there are tremendous racial disparities with respect to traditional credit scores. It is the result of centuries of slavery and discrimination which led to the huge racial wealth gap. Alternative financial data is also likely to have racial disparities for the same reasons. The critical question is whether the alternative data or algorithms lessen or increase racial disparities and whether it is more predictive or less than traditional models. These two questions are closely tied to the test for disparate impact under the Equal Credit Opportunity Act. If the alternative data is less predictive, there is less of a business justification for it, under the disparate impact test. On the other hand, if it creates less of a racial disparity, it could be a less discriminatory alternative than traditional scoring. In terms of regulation, all third-party alternative data used for credit should be considered a consumer report under the Fair Credit Reporting Act (FCRA). Unfortunately, several courts of appeals haven't respected the plain language of the FCRA and its broad coverage. We urge Congress to reaffirm this broad coverage, because the FCRA has critical protections. One of the key issues with alternative data is accuracy, the FCRA addresses accuracy, and it gives consumers the right to dispute errors. The FCRA, as well as the ECOA, also requires notices for the purpose of transparency, requiring lenders to disclose the source and type of information so consumers aren't left in the dark as to the reasons for credit decisions. Having black boxes to evaluate creditworthiness should be a thing of the past. I thank you for the opportunity to testify and I look forward to your questions. [The prepared statement of Ms. Wu can be found on page 80 of the appendix.] Chairman Lynch. Very good, thank you. Mr. Rieke, you are now recognized for 5 minutes. STATEMENT OF AARON RIEKE, MANAGING DIRECTOR, UPTURN Mr. Rieke. Chairman Lynch, Ranking Member Hill, and distinguished members of the task force, thank you for the opportunity to testify today. We are here because approximately 45 million Americans do not have access to credit because there is a lack of quality data with which to underwrite them. Alternative data can certainly help. I want to echo Ms. Wu and say that the devil is in the details, and to suggest that we are really talking about two categories of data here: conventional data; and fringe data. Conventional data consists of things like various payment histories, bank account balances, information about an individual person's financial capacity. Fringe data consists of things like social media data, information that may be correlated with this financial capacity but is much further removed. Conventional data is promising; fringe data raises concerns. To understand why, think about traditional FICO credit scores. These credit scores are not conceptually complex. Most of their predictive value comes from people's payment histories. That is really the number one factor in the recipe of FICO scores. The logic is simple. If a consumer is keeping up with their current financial obligations, it is reasonable to predict that they can take on new financial obligations. As it turns out, the same basic logic applies to many kinds of conventional data. The best available evidence suggests that bill payment histories are similarly predictive and can help otherwise unscoreable consumers access credit. Another example, cash-flow data obtained from a consumer's bank account with their express permission, can provide an immediate high-quality picture of that person's ability to repay a loan, even without a credit bureau being involved at all. That is conventional data. The story gets murkier when we talk about fringe data. Expansive data sets about people's social connections, the kinds of websites they visit, where they shop, and how they talk do not have the same simple, intuitive connection to each individual's ability to repay a loan. These can yield blunt stereotypes that might be predictive, but for the wrong reasons. Let me offer you an analog analogy. Imagine I offered to build you a credit-scoring model that relied on a person's ZIP Code. That should feel intuitively wrong. I want to unpack why. First, we know that geography reflects deep-seated social inequities. The result would almost certainly be textbook disparate impact. Second, judging from ZIP Codes would paint with too broad a brush. It would do little to help many of the unscoreable consumers we seek to help most who already live in low-income neighborhoods. Latching on to traditional markers of wealth and privilege aren't going to get us to where we want to be. My point is that thousands of behavioral data points thrown into a complicated, machine-learning, artificial intelligence model can actually act and behave just like a ZIP Code. In the absence of rigorous public scrutiny, we should be skeptical of fringe data. I want to note, because Facebook was brought up in opening remarks, that Facebook has for a number of years had a policy that prohibits third parties from using Facebook users' data for any kind of eligibility purpose. So, if you see a start-up company touting their use of Facebook data, ask them why they are violating Facebook's policies. That may not be the case forever, but I think today that indicates that we are not ready to embrace this new data set. In short, this task force should focus its efforts on encouraging the use of alternative data that is closely related to loan performance, has an understandable relationship with an individual applicant's creditworthiness, and has been evaluated for compliance with anti-discrimination laws. Fortunately, this is all doable. More collection and use of alternative data makes the Fair Credit Reporting Act and the Equal Credit Opportunity Act more important than ever before. I would urge Congress to ensure that new kinds of alternative data are only used for credit underwriting, where we have researched and understood their role, and not for things like employment and insurance. Finally, as you are all aware, thanks to the advocacy of Ms. Wu and her colleagues, any new policies around alternative data must respect important State and local consumer protections. Thank you again for the opportunity to testify, and I welcome your questions. [The prepared statement of Mr. Rieke can be found on page 74 of the appendix.] Chairman Lynch. I thank the gentleman. Ms. Johnson, you are now recognized for 5 minutes for a summary of your testimony. STATEMENT OF KRISTIN N. JOHNSON, MCGLINCHEY STAFFORD PROFESSOR OF LAW, TULANE UNIVERSITY LAW SCHOOL Ms. Johnson. Good morning, Chairman Lynch, Ranking Member Hill, Ranking Member McHenry, members of the committee, and members of the task force. Thank you for inviting me to participate in this hearing to discuss the use of alternative data in credit underwriting and credit scoring. I am a professor of law and associate dean of faculty research at Tulane University Law School, but I have previously worn other hats. I was an analyst at Goldman Sachs, a vice president and associate general counsel at JPMorgan, and an associate at a New York law firm with a globally recognized transactional practice. During my tenure in financial services and as an academic, I have learned a few things about financial markets, including the lesson that credit is a critical resource. Individuals and families increasingly rely on credit to finance household purchases and overcome significant unanticipated expenses. Without access to credit on fair and reasonable terms, it can be extraordinarily expensive to be poor. For families with fragile financial circumstances, credit may serve as a lifeline, enabling consumers to meet short-term debt obligations and to pay for education, transportation, housing, medicine, childcare, and even food. Two critical developments create promise for the 26 million Americans referenced earlier as credit invisible, those without credit histories, and the 19 million Americans who have thin, impaired, or stale credit histories described as unscoreable. First, the birth of Big Data. The collection, storage, and analysis of vast volumes of consumer data fuels artificial intelligence or automated decision-making platforms. Similar to the proliferation of AI in health care, employment, criminal law, surveillance, and communications, the rise of AI in finance monetizes consumer data. Consumers' web browsing, click-stream data, and social media networking, which we could describe as consumers' digital interface, is matched with or paired with consumers' financial transactions, checking and saving account cash flows, and credit and debit card transactions, fueling data mining and engendering a new set of behavioral criteria we can describe as alternative data. While fintech firms integrating alternative data offer great promise, it is very much worth noting that this new species of financial market intermediaries also presents great concerns. In my limited time this morning, I note three challenges that arise when we integrate and endeavor to regulate alternative data. First, alternative data may, as mentioned earlier, disadvantage vulnerable, marginalized consumers, particularly those who are members of legally protected classes. Under the behavioral scoring model, your friends on Facebook, the people in the pictures you post on Instagram, and those you chat with on WhatsApp--I am happy to deconstruct that later for those unfamiliar--may signal more than whether or not you have street cred. These connections may determine the interest rate on your next mortgage. It is not yet clear how these new sources of data will impact credit invisibles and unscoreables, groups often disproportionately comprised of women and people of color. Unsavory lending practices, detestable marketing tactics, and usurious interest rates have too often plagued these marginalized consumers. Second, learning algorithms evaluate facially neutral, alternative data, yet may result in variables that function as proxies for protected traits or result in decisions that may have a disparate impact on members of legally protected classes. Consider, for example, Amazon's recent experiment with an algorithm tasked with reviewing resumes for a software programmer position. Armed with the resumes of previous hires and general instructions regarding qualifications, the algorithm went rogue. Because previous hires were predominantly men, the algorithm began to discount references to women, including references to women's chess club captain or all- women's colleges. Unknowingly, the algorithm replicated historic discriminatory hiring biases. In credit decisions, these results may be actional, as noted earlier, under the Equal Credit Opportunity Act and fair lending and fair housing regulations. Finally, alternative data raises concerns regarding consumer privacy and cybersecurity concerns. Beyond Equifax's settlement this week, there is more breaking cybersecurity news. A 20-year-old computer programmer successfully launched a cyber attack against another nation's national revenue agency, signaling that it is imperative to ensure that any entities that collect, store, and transfer consumer data have developed sufficient security mechanisms. CRAs may also struggle with respect to the obligation to describe and explain adverse credit decisions. Because of the inscrutable nature of learning algorithms, they are non- intuitive, opaque, and their operations are not often easily explained. Finally, in my written testimony I note as well that there is an even newer class of emerging financial intermediaries within the fintech ecosphere, or ecosystem--blockchain-based CRAs. I reference in my written testimony Bloom, one example of a blockchain-based credit reporting agency or an entity that will operate in a manner similar to a credit reporting agency, that is also presumably to rely on alternative data. For these reasons, I encourage and urge Congress to think carefully about comprehensive legislation outlining the appropriate uses for alternative data and data governance, storage, transfer, and cybersecurity protections, as well as enforcement of antidiscrimination norms. [The prepared statement of Ms. Johnson can be found on page 57 of the appendix.] Chairman Lynch. Mr. Evans, you are now recognized to give us a 5-minute summary of your testimony. STATEMENT OF LAWRANCE L. EVANS, MANAGING DIRECTOR, FINANCIAL MARKETS AND COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE (GAO) Mr. Evans. Thank you very much, Chairman Lynch. I am pleased to appear before you, Ranking Member Hill, Ranking Member McHenry, and the members of the task force to discuss the use of alternative data in underwriting. My testimony is largely based on our December 2018 report, which covered several fintech lending issues. The problem with the current credit-granting ecosystem has been well-articulated, namely its limits in its ability to reach certain borrowers. We know that alternative data provides an opportunity to improve the status quo by expanding access to credit, improving prices, speeding up decision-making, and preventing fraud, but it is also important to know that some of what we refer to as alternative data is not new. However, the types of alternative data available have expanded significantly due to the ability to secure large volumes of consumer and behavioral information, including data on consumer spending and shopping habits, internet browsing history, online social media networks, educational affiliations, and other factors that may not have a clear nexus with creditworthiness. In combination with analytic techniques like machine- learning, these factors provide predictive power for fintech companies looking to enhance their ability to determine who is eligible for credit. But alternative data is not a panacea. Depending on the specifics of these data and the analytical techniques used to extract information from them, these innovative approaches can bring significant risk. One of the major concerns is that usage of that data may produce lending outcomes that result in disparate impacts or violations of fair lending laws, unintentionally in some cases. For example, according to a Federal Reserve newsletter, it has been reported that some lenders consider whether a person's online social network includes people with poor credit histories, which can raise concerns about discrimination against those living in disadvantaged areas. Another concern is that there may be a lack of transparency about what alternative data are being used and how they ultimately factor into credit decisions. This potential opacity could raise issues, not only for consumers, but for fintech firms themselves looking to comply with fair lending requirements. It may also be unclear whether a borrower has the ability to dispute the accuracy of the information used. The great challenge ahead is to manage the risk-reward balance of innovation and ensure our experience with alternative data does not mimic our experience with alternative mortgage products leading up to the financial crisis. To better ensure the risks are managed without stifling innovation, which is extremely important, policymakers and regulators will need to sort through a number of different tradeoffs and considerations. In the meantime, implementing key recommendations that GAO has offered to regulators would assist them in addressing some important deficiencies as we see them. Fintech lenders and their banking partners we spoke to indicated they face challenges due to regulatory uncertainty about the appropriate use of alternative data. Representatives of one bank said that a fintech partner's use of alternative data may be attractive from an innovation and business perspective, but the bank would likely hesitate to use this data due to regulatory uncertainty. While Federal agencies monitor the use of alternative data, they have not provided firms with the types of communication that they need to really think through the appropriate use of this data in the underwriting process. We believe coordinated guidance from the regulators may better position fintech lenders and their bank partners to responsibly use alternative data. In our prior work, we have also recommended that agencies formally evaluate the feasibility and benefits of adopting knowledge-building initiatives. We believe these initiatives will help firms understand the applicable regulations, improve regulators' knowledge of fintech products, and facilitate interactions between all parties. Chairman Lynch, Ranking Member Hill, Ranking Member McHenry, and members of the task force, this concludes my opening statement. I look forward to any questions you may have. [The prepared statement of Mr. Evans can be found on page 42 of the appendix.] Chairman Lynch. Thank you, Mr. Evans. Mr. Girouard, you are now recognized for 5 minutes. Welcome. STATEMENT OF DAVE GIROUARD, CEO AND CO-FOUNDER, UPSTART NETWORK, INC. Mr. Girouard. Chairman Lynch, Ranking Member Hill, Ranking Member McHenry, and members of the Task Force on Financial Technology, thank you for the opportunity to participate in today's conversation. My name is Dave Girouard, and I am co- founder and CEO of Upstart, which is a leading artificial intelligence lending platform. I founded Upstart more than 7 years ago, in order to improve access to affordable credit. In the last 5 years, almost $4 billion in bank quality consumer loans have been originated on our platform, using a model that combines alternative data with AI and machine-learning algorithms to determine a borrower's creditworthiness. Concerns about fairness in algorithmic lending, particularly in the use of alternative data, are well-founded. As a company focused entirely on reducing the price of credit for the American consumer, fairness is an issue we care about deeply. In the early days at Upstart, we conducted a retroactive study with a large credit bureau, and we uncovered a jarring pair of statistics: Just 45 percent of Americans have access to bank quality credit, yet 83 percent of Americans have never actually defaulted on a loan. This is not what we would call fair lending. The FICO score was introduced in 1989 and has since become the default way that banks judge a loan applicant, but in reality, FICO is extremely limited in its ability to predict credit performance because it is narrow in scope and inherently backward-looking. At Upstart, we decided to use modern technology and data science to find more ways to prove that consumers are indeed creditworthy, to bridge that 45 percent versus 83 percent gap. We believe that consumers are more than their credit scores, and by going beyond the FICO score and including a wide variety of other information such as a consumer's employment history and educational background, we have built a significantly more accurate credit model. While most people believe a better credit model means saying no to more applicants, the truth is just the opposite. Because Upstart's model is more accurate, we have significantly higher approval rates and lower interest rates than a traditional model. But we also understood that consumer protection laws weren't to be taken lightly. Thus, we proactively met with the appropriate regulator, the Consumer Financial Protection Bureau (CFPB), before launching our lending program. After several years of good-faith efforts between Upstart and the CFPB to determine the proper way to measure bias, we demonstrated that our AI-driven model doesn't result in unlawful disparate impact against protected classes of consumers. Because AI models change and improve over time, we developed automated tests with the regulators' input, in order to report on the impact of our credit decisions across underserved groups on a quarterly basis. We have been providing this information to the CFPB for the last 18 months. Moreover, we were able to report to the CFPB that our AI-based system improved access to affordable credit; specifically, our model approves 27 percent more consumers and lowers interest rates by 3.57 percentage points compared to a traditional lending model. For near-prime consumers in the 620 to 660 FICO range, our model approves 95 percent more consumers and reduces interest rates by 5.42 percentage points compared to a traditional model. And, most importantly, Upstart's model provides higher approval rates and lower interest rates for every traditionally underserved demographic. That is the type of consumer benefit we should all get excited about. In September 2017, Upstart received the first ever no- action letter from the CFPB, recognizing that Upstart's platform improves access to affordable credit without introducing unlawful bias. The concern that use of alternative data and algorithmic decisioning can replicate or even amplify human bias in lending is well-founded. However, in Upstart's experience, the fair-lending laws enacted in the 1970s and the substance of fair-lending enforcement, that is, monitoring and testing the impact on actual consumers who apply for loans, translates very well to the AI-driven world of today. But in reality, the path we walked at Upstart is insufficient to create a robust and competitive market that will maximize financial inclusion and credit access. In our early days at Upstart, we couldn't know for certain whether our model would be biased. It wasn't until loans were originated that we were able to demonstrate that our platform was fair. As an early-stage startup, this was a risk worth taking, but it is not a risk a large bank would have considered. If broader and deeper financial inclusion among American consumers is important to this committee, it is worth considering rulemaking or legislation that will provide some type of limited sandbox for model development and testing. By combining regulatory support with model innovation, with rigorous and standardized testing, we can ensure that we don't forego the clear and obvious benefits that AI and alternative data can offer to the American consumer. Thank you. [The prepared statement of Mr. Girouard can be found on page 54 of the appendix.] Chairman Lynch. Thank you. I now yield myself 5 minutes for questioning. Thank you all. This is a great group. One of the nicer things about this task force is that it is bipartisan, and we are here for the same purpose: We are looking for guidance. We have an assortment of issues that we are confronting. Obviously, the banking industry is transformed, I think, because of technology so that we have an old banking culture that is very much rule-based, and it seems to be merging or morphing into this sort of tech hybrid where you move fast and break things. And so, there is that clash of cultures. But I can generally group our concerns into four areas. One is the whole issue of companies vacuuming up this personal data, this behavioral surplus, as Shoshana Zuboff describes in her book, ``The Age of Surveillance Capitalism.'' And under what conditions do consumers have a choice in terms of what gets vacuumed up and what gets used in terms of the algorithms that are employed to judge their creditworthiness or on other matters. There is that whole permission aspect that Ms. Wu and Ms. Johnson both raised. Actually, all of you, I think, addressed that in some regard. Then the data use, how that gets used, what data is permissible to use and what is not. Then, one of the concerns that this committee has is regarding the security of that data. We had Facebook in, and Mr. Marcus, who is heading up their Libra cryptocurrency project. And it is obvious from our history with Facebook, that Facebook does not do privacy well, and so we worry about that. If you look at the terms of service agreement, the one that is on your phone with Facebook, it is about 20 pages long. And if you look at it closely, it basically is the opposite of a privacy agreement. It basically gives Facebook the ability to gather all your data and then sell it to their advertisers. And if you don't agree, if you don't click, ``I agree,'' you don't get Facebook. So, I am worried about fintechs using that same sort of adhesion contract to get people to surrender their data, in order to get the value of what Mr. Girouard has described, which is perhaps lower rates, better access to credit, all the benefits that might flow from one of the fintech lenders. And then, lastly, we are struggling with how to hold people accountable with financial data. Should there be--I asked Mr. Marcus, but he wasn't forthcoming with an answer--I asked him, I said, would you accept fiduciary liability for the mishandling of consumers' personal financial data because of the consequences that can occur because of that mishandling? So, Ms. Wu, let's talk about, how do we get into this? How do we introduce this permission regime where people can--and, Ms. Johnson, I will go to you on this as well--how do we introduce this? Right now, it is a permissionless vacuuming up of data. How do we change the paradigm and the model from what we have now to a more rule-based, if you will, structure with some of the fintech that is emerging? Ms. Wu. Thank you for the question, Chairman Lynch, it is an excellent one. There is the sort of limited issue of alternative data for credit purposes, where we would urge that any legislation always be on an opt-in basis, that consumers have a choice, and that that choice be real and meaningful, that it not be in mice type of 20 pages of fine print that you mentioned. From a broader perspective of privacy in general, yes, we all should have more control over our own data, the right to opt in, opt out, or even have our data deleted. Chairman Lynch. Very good. Ms. Johnson? Ms. Johnson. I think that Ms. Wu's point is absolutely consistent with what our expectations ought to be. I think the challenges are two-part, one part technical, so I might defer to Mr. Girouard to respond as to how their model might address this very specific and technical point. But for AI to be effective, as I describe in my written testimony, there has to be a certain quantity or volume of observations available. They have to be uniform to a certain extent, and that facilitates the learning algorithm's ability to work through the data in a manner that is exceptionally efficient and reduces operating costs, thereby enabling fintech lending platforms to reduce the cost of borrowing for consumers. One of the challenges I am very curious about how we will navigate is the extent to which we are rightly asking that consumer's consent prior to their data being used, and how we reconcile that with how machine-learning algorithms operate. So, I think there is a gap there that we have to have enough of a conversation about, to be successful in crafting regulation. The other thing I just mentioned really quickly about consent is that the extent that the data is being gathered really may be the point of departure for some of our concerns. In many instances, consumers are completely unaware that the data is being gathered. And in some instances, they are voluntarily giving the data over for the better credit opportunities or reduced price credit opportunities, which is disconcerting, to be quite honest, because it suggests those who are most vulnerable might be exposed to--or exploited, in fact, by arrangements whereby they share the most intimate details of their financial lives or their personal lives for the purpose of getting better access to credit. Chairman Lynch. Thank you very much. I now yield to my friend, the gentleman from Arkansas, Mr. Hill, for 5 minutes. Mr. Hill. Thank you, Mr. Chairman. And, again, thanks to the panel. This is another really excellent panel that has been assembled for the task force work, and I think all of you bring a great perspective. Certainly, this issue of customer choice is an important one, and we all are frustrated, I think, with moving away from passwords into a more robust authentication, which is critical to a digital world, critical to fintech being successful, whether you are working at the biggest bank in the country or a great startup. We need to get beyond ``password1'' and our name as authentication, and we have been talking about that a lot. Secondly, this issue of, I own the data, I am the consumer, and I am allocating you some data for a project we are working on together, and so broadening that transparency in access to my data for the purpose of taking a decision that I want to have with an online partner. These are really important areas and thank you for bringing those up. Mr. Girouard, I want to talk a little bit about your model and the alternative use or, as was described by Mr. Rieke, your expansion, I would say, of conventional data. I will ask if you use ``fringe data'' or not, as he defined it, but we will find out. But I am very impressed that you have been working 18 months with the CFPB, which is a beloved institution in Washington and certainly in this committee and, therefore, has imminent authority over that relationship. And congratulations for having a no-action letter. We think that is a great improvement for CFPB operations as an absolutely serious comment and a great way for them to demonstrate the ability for fintech innovation in a mini sandbox if you want to call that a derivative of that. My first question is, the conventional data you expand beyond FICO, what is the nature of that in your business? Mr. Girouard. Sure. I want to say first thatthe data we use in our models comes entirely from two sources: one, is a credit reporting agency; and two, is directly from the consumer themselves. So we aren't ``hoovering data in many places.'' We don't take data from Facebook, et cetera. What we to do is include information--and I had mentioned a couple of them-- somebody's work history, where do they work, are they a nurse, are they a policeman, et cetera, their educational history, the degree of education obtained, their area of study. These are things that are unique to our model. We also look at some behavioral things when they interact with us, what sort of--how much--what size loan do they ask for, how did they find us, things of this nature. These all end up being helpful and predictive toward our model. Mr. Hill. Do you consider that--of course, it is provided by the customer. They are seeking the loan, so they have granted you permission to do that. Are you also seeing their cash-flow data for a period of months by access to their bank account in making your determination? Mr. Girouard. Today, that is not something we do. We do request and, with consent, get access to a bank account really for verification purposes and to avoid fraud and such. But it is, as of today, not part of our credit decisioning. Mr. Hill. You talked about how you are doing that, and, of course, the CFPB is learning, too, and you keep some of your credit, and your partner bank has some of your credit originated by you on their books, and then you securitize credit. So, for the loans that you keep and for the loans that are on the bank's books, of course, those are being reviewed by compliance officials for compliance with all fair lending laws and the like? Isn't that right? Mr. Girouard. Sure. There are many layers of oversight and governance over what we do. The vast majority, almost all Upstart loans are originated through bank partners--some of which are FDIC-regulated, and some of which are OCC-regulated. So, we are beholden to all of them and go through very regular audits and such. Mr. Hill. What is your view of what statutorily ought to change about the creation of a sandbox at our bank regulatory agencies? What does that mean to you? I see it in your testimony. You don't really explain what you mean by that. How do you define it? Mr. Girouard. Our belief, as I said, is that the right way to handle regulation for alternative data, and the use of alternative data is actually to measure the outcome, to look at its impact on consumers and whether there is bias in the outcome. The challenge with that, and the way the world works today, is, you don't know until you originate the loans. So, you are taking on some risk that, during that period of evaluation of building and testing that model, you could be in violation of the law, of fair-lending laws. The sandbox concept is, how do you actually make progress there? How do you actually build a better model that is both more effective and more accurate, but also fair and unbiased without testing and moving? And the notion of a sandbox is to provide some freedom, not just for a startup like we were 5 years ago, but to a large financial institution, a bank, to do the same thing. Mr. Hill. This is like a phase one or a phase two clinical trial in the drug research industry. How long do you think that would take and how much of a Big Data set would that be, in just your world of personal lending, do you think would be necessary to prove out a concept like that, analytically? 18 months? Mr. Girouard. Yes. That is-- Mr. Hill. Do you look at it in time, or do you look at it in total data set, or both? Mr. Girouard. It is a little of both. Mr. Hill. Because you have to go through the economic cycle of these borrowers, to some degree, some seasoning of these borrowers. Mr. Girouard. That is really about the efficacy question, meaning, does this model work well? But the fairness question actually is answered quite quickly because you know right away who you are approving andwho you are not approving. Mr. Hill. Thank you. I yield back, Mr. Chairman. Chairman Lynch. The Chair now recognizes the gentleman from Georgia, Mr. Scott, for 5 minutes. Mr. Scott. Mr. Evans, let me start with you, because in your testimony you provide a very good survey of the literature of the potential benefits of alternative data, but you also mention the risks. First of all, I think it would be helpful if you gave us some examples. What are we talking about when we say alternative data? What would that be? Mr. Evans. This could range from data that we have had significant experience with, like on-time rental payments, mobile payments, and the like. But it could also be data that we glean from your digital footprint online or your browser history. Mr. Scott. But these data points also must uphold the fair lending laws and standards that we have in place. I think the critical question is, how do we strike the balance? How do we strike the necessary balance, particularly given the innovative nature, the rapidity of our technology moving? Mr. Evans. Excellent question. And there are two things that I would point out from our body of work. One, we looked across the globe, and we looked at some of the innovative things other countries were doing, and they were things like the regulatory sandboxes, and innovation offices. We have to understand the technology, and the way to understand the technology is to engage. We have recommendations that are open to regulators to make sure they are carefully thinking through whether these innovation offices and other types of knowledge- sharing initiatives would be appropriate here in the United States. Also, guidance is extremely important because it sets the rules of the road. It sets parameters. And if the fintech firms aren't getting that kind of guidance, they are not-- Mr. Scott. And do you think the regulators are living up to that? Do you think they are giving this guidance properly now? Mr. Evans. I would say no. There are certainly places where you can find good information from the Federal Reserve and others, but they haven't communicated this guidance in a written, formal way, so that people understand that this is relevant guidance for firms to follow. When you get many touches across the fragmented regulatory system, it is helpful to know that the guidance is coordinated; it is not coming from just one regulator. Mr. Scott. Ms. Johnson, you said something in your statement that I agree wholeheartedly with: you said that credit is a critical choice. It is almost a life-and-death choice. Can you imagine not having a checking account? Not having a savings account? Not having a credit card? Not having any history in this time? And yet, we have almost 60 million Americans in that shape. How critical, in your words, is this, at this point, with our unbanked, and if we fail in this ability to make the alternatives work, what would that look like? How serious is this situation facing hese 60 million unbanked, or what you refer to as invisibles, and making them visible? Ms. Johnson. This is a great question. Thank you. I think I might dissect or sort of bifurcate the question into two parts, one part just being thoughtful at the outset about the idea that credit, as we are describing it, originates from--or the decision-making process, or determinations about credit, originates from an evaluation of eligibility, right? The notion that credit reports are used merely for credit is mistaken. We know that credit reports might be used in other processes to determine employment and access to other resources. So, in some instances, we are talking about credit and the data that is evaluated to determine whether or not someone has access to credit, as a gateway. This is a sort of a gateway to a variety of critical access, to a variety of critical and important resources in our society. Credit is a critical resource and credit reports are a critical factor in the lives of individuals because it may impact their ability to access other resources beyond credit, right? Mr. Scott. Yes. Ms. Johnson. That is the first point, just to segregate out the ideas that what we are evaluating here, the data that is being gathered, there are many important impacts with respect to that data, that are beyond just simply whether or not one qualifies for a credit card or a home mortgage loan. Although, access to those resources is important as well. I would also underscore--Congresswoman Porter was one of my colleagues in the academy before joining you all here on the committee and in Congress, and her work has historically, along with others, underscored the significance of the financial status of individuals as impacting a variety of elements of their lives, and your point underscores that as well. I just suggest that credit and the data that is being gathered for the purposes of evaluating credit will impact access to financing, but it impacts access to a number of other things, including education. Mr. Scott. And, Mr. Chairman, may I just ask this--one of the values of-- Chairman Lynch. The gentleman has gone a minute-and-a-half over. Go ahead, though. Mr. Scott. Thank you. One of the values of the fintechs is that they are now providing help and services to the unbanked that our traditional banks are not doing, will not do. And I am not going to ask you to answer that, but I am sure you will agree that that is an area we can develop more of, to use our emerging fintechs to be a valuable asset, because many of the existing actors in the financial services industry are not going to touch these unbanked and underbanked. But, anyway, thank you. And thank you, Mr. Chairman. I'm sorry. Chairman Lynch. Quite all right. The Chair now recognizes the ranking member of the full Financial Services Committee, the gentleman from North Carolina, Mr. McHenry, for however much time he may consume. Mr. McHenry. I will respect the Chair. Thank you, Mr. Lynch. And thank you, Mr. Hill, for your leadership. It is my hope that this task force can--we can build some consensus around financial technology. This is a nonideological space in an otherwise highly polarized Washington. And I think it shows that we can use technology to get better societal outcome--well, the same or better societal outcomes that we seek in current law. We have very important provisions of law that have been put in place through a massive amount of work to ensure that we don't discriminate against people based off of what I would describe as superficial reasons. And that work, where you are located, what you look like, who your parents were, any of that stuff, right? And what we see now in China is that you have this--you have a social score as well. And it is political connections and all of this stuff. And I hear this underlying the whole panel, we don't want that. Just because you tweet and you are a jerk on Twitter doesn't mean you are uncreditworthy. Or if you follow nuts on the left or the right on Twitter, that should not make you more or less creditworthy. Getting into the fundamentals of this, how you use alternative data, Mr. Girouard, you brought this up. Let's talk about the sandbox approach that Mr. Hill brought up in his question. So, the question of innovation and financial inclusion, I think, should go hand-in-hand. What are the benefits of a sandbox approach, Mr. Girouard, in your view? Mr. Girouard. As someone who has gone through the process, as we did over 4 years, frankly, with the CFPB, the sandbox isn't to our advantage. We already walked the walk and walked over the coals. But honestly, in the interest of the American consumer, you want a robust environment where not just small companies but the largest banks have an opportunity to innovate in modeling and in credit decisioning, because it can only benefit the consumer. A sandbox is necessary because--let me just give an example. In the very early days of our lending, I met with the CEO of one of the top banks in the country, one of the largest card issuers in the country, and his words to me were, ``I love what you are doing. I am really glad you are doing it, because we will never be able to do that.'' And I think honestly, it may be to my business advantage that that is the case, but it is not to the American consumer's advantage. We need innovation across the industry, not just in unsecured personal loans, but in mortgages, in auto lending, in HELOCs, in all flavors of credit. Mr. McHenry. What will the benefit be if you use alternative data and somebody has, under a traditional score, less than A-plus credit, but you see through alternative data that they actually pay their rent, they pay their cellphone bill, and they have never missed those payments, it enhances that credit score, right? Others, it would actually say that that credit score is not as good, because they are not paying or they continue to have issues. There is this picking and choosing, when you say, we only want to use good stuff, if it is alternative data. Well, that is not representative that everyone is a good credit risk, right? How do you prove that out in terms of ensuring it is not discriminatory based off of our traditional metrics under Federal law? Mr. Girouard. Let me just say, the important background is that FICO and income, which are the two anchors of almost any lender, are terribly biased. And they are so biased that the additional of alternative data, whether that is education, whether that is the name of the company you work for--there are a variety of other things--actually reduces the bias and the credit decisioning, because the baseline is so biased itself. That is why it represents such an opportunity. The other really important-- Mr. McHenry. Okay. Across the panel, does anybody disagree with that statement? Ms. Johnson. I would add something. Mr. McHenry. But any disagreement with the contents in the last 5 sentences of what Mr. Girouard said? Anyone on the panel? Ms. Johnson. There is bias certainly in the existing data, because it is the result of systemic--we just talk about data collection for algorithms generally. We have to acknowledge that at the outset, the data that is being collected is biased. One of the best and easiest, most accessible examples, would be in criminal law enforcement. To the extent that an area is overpoliced by police in a particular city or area, there will be more arrests in that area-- Mr. McHenry. No, but I am talking about consumer credit, and I am talking about the specifics of this. That is a larger societal issue. We are the Financial Services Committee and not the Judiciary Committee. That is a major issue; I certainly understand that. And I appreciate that. But let's talk about what we are going to fix here in the Financial Services Committee. When you say that alternative data can be an enhancement--and I understand all of the caveats that all of you in a very loyal sort of way, if I would say, say, yes, it has great opportunities but there are risks. Of course there are, right? 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, rather than underbanked or unbanked. And so, I appreciate the hearing. And with that, Mr. Chairman, I yield back. Mr. Scott [presiding]. Thank you, Mr. McHenry. The gentleman from New Jersey, Mr. Gottheimer, is recognized now for 5 minutes. Mr. Gottheimer. Thank you, Mr. Chairman, and thank you to all of the witnesses for being here today. I appreciate it. Traditional information used to make lending decisions and establish credit scores often does not account for the 26 million customers and consumers without a credit history or the 19 million consumers with a short or outdated credit history to form a credit score, groups that are often labeled as thin file or credit invisible. Thankfully, lenders and CRAs have started using alternative data to make lending decisions, determine credit scores, and expand consumers' access to data. I 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. That is why I am working on the Credit Access and Inclusion Act, legislation that would allow the reporting of certain alternative data like rent and telecom payments to consumer reporting agencies to help thin-file consumers build their credit scores and hopefully access credit. We also must ensure traditional credit bureaus and those using alternative financial service data still comply with the Fair Credit Reporting Act, also known as FCRA. Ms. Wu, if I can start with you, how can we ensure that alternative data sources comply with FCRA data furnishing requirements? Ms. Wu. Thank you for the question, Congressman Gottheimer. One of the things we need to clarify is that any time third-party data is used for credit decisioning, it should be covered by the Fair Credit Reporting Act. The example of Facebook, for example. Facebook may have a disclaimer in its website saying you are not supposed to use it for credit. But if they are doing it wink, wink, nudge, nudge, and lenders are using it for credit, it should be covered by the Fair Credit Reporting Act. And so Congress should clarify that, but I also want to say in the area of sandboxes, the devil is also in the details. Sandboxes shouldn't be a license to ignore things like the Fair Credit Reporting Act and the requirements for accuracy, predictiveness, and notices. Mr. Gottheimer. Thanks for your answer. Just a follow-up to that, what kinds of alternative information would you seek to use that is not already shared by applicants or regularly requested as part of loan applications, rental payments, bank statements, and, of course, under the Fair Credit Reporting Act? Ms. Wu. First of all, the most important aspect is consumer choice. The consumer should be allowed the option of sharing it or not. 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, if they want to say, hands off my data, that also should be respected. And then the lender should consider that in the same way they consider credit data. The other side of this equation of alternative data is, are the lenders actually going to use it? We have seen lenders who won't even upgrade to the latest FICO model, let alone use an alternative score. So, one of the tough parts is actually getting the lenders to look at it. And I think one of the things that this committee has done that is useful is passing Chairman Lynch's bill giving the CFPB authority to regulate the scoring models. We have heard from Mr. Evans that there needs to be guidance from the regulators. The best thing to do is have the experts at the CFPB review these models and ask, is this predictive, is this accurate, does this create disparate impact? And the bill that this committee passed does that. Mr. Gottheimer. Do you see that changing with some of the financial institutions? I know that many aren't considering other datasets. Do you see that changing? Is there a desire to--how is the trend line on that? What do you think would really spur that along? Ms. Wu. I think the things that will spur it along are things like, Fannie Mae and Freddie Mac are going to be needing to update their scoring models, and we have actually encouraged the use of pilots, limited pilots with alternative scores. Mr. Gottheimer. And are we seeing good news out of that? Are we getting more access to credit for people? I really am grateful for your leadership in this space, because I think it is very, very important that more people have access who should get it, who qualify for it, but just because of traditional, the way we have done things forever, they are not getting access to it, or because it is so black box that you don't know what is in it. And I think that lack of transparency also has a big impact. Ms. Wu. Fannie and Freddie have not adopted the new scoring models yet, but some of the other testing that has gone on has shown some promise. Again, the devil is in the details. We need to be careful. There is going to be some disparate impact. But the thing about the disparate impact test is, it doesn't say, okay, there are some racial disparities you have to stop. Are there more racial disparities or less? Is it predictive? Predictiveness is so key here. And if it is not predictive, you shouldn't be using it. Mr. Gottheimer. Thank you so much. I yield back. Mr. Scott. Thank you. The gentleman from Ohio, Mr. Davidson, is recognized for 5 minutes. Mr. Davidson. Thank you, Mr. Chairman. I thank our witnesses, and I thank all of my colleagues for thoughtful questions and good dialogue. And hopefully, this will yield some progress in this really important space. Mr. Girouard, I want to follow up where Mr. Hill left off when he was talking with you about how much time would this take and how would a sandbox work in a regulatory framework where we have maybe provided certainty for this path with legislation. And in your response to him, you said, well, we don't really need 18 months; you can know pretty quickly whether it is discriminatory or not; i.e., is it working? And I just want to pick up from there, because it seems incomplete. Because if you give credit to everyone at low rates or, say, free, it is not discriminatory; it is all free to everyone, whomever shows up, or it is a fixed rate for everyone, no matter what, it is not discriminatory. But if there is a massive default rate, it really doesn't work, right? You do care about defaults, correct? How far into that process could we know is it both nondiscriminatory and actually effective in the sense that it provides a useful tool? Mr. Girouard. That is a good question. It certainly varies based on the nature of the product. A mortgage, for example, plays out over many, many more years. But you do need enough data, you do need to understand both fairness and efficacy. Fairness can be sorted out fairly quickly. Efficacy takes time. You need to see how a loan performs. Mr. Davidson. Is it really fair to give money to somebody who has no hope of repaying it? Mr. Girouard. No, it is actually against everybody's best interest to do that. Ability to repay-- Mr. Davidson. Efficacy is inherently linked to fairness is, I guess, the point. And so, I am just curious. If you look at probabilistic models and you look at the statistics and say, hey, if you have this pattern, is there a dataset that shows what the--95 percent certainty, 99 percent certainty, what range of probability of payment history in the early years, could you say the sandbox has produced an effective tool so that it is both nondiscriminatory and it is efficacious? Mr. Girouard. Congressman, you are asking exactly the right questions. The sandbox has to be defined in a way that allows the lender to decide if this new model works. And it won't be the same sandbox for every type of credit product for a variety of reasons-- Mr. Davidson. Okay. That gives me concern, because there is no real hope to pass a law that could provide certainty. It is essentially like, go negotiate your own deal with a regulator. Mr. Girouard. With all due respect, I think rulemaking could absolutely define a sandbox in terms of number of loans, how long the sandbox can operate for, the total dollars in it. There is no question in my mind that a reasonable process could define rules that put a sandbox in place for the major areas of credit for consumers. That would make a significant improvement in the ability to see innovation in this area. Mr. Davidson. Yes. Thanks for your expertise, and I appreciate your experience in the matter. Mr. Rieke, your background in privacy at the FTC is interesting, because so much of this links on privacy. And in the United States, particularly in banking, with Gramm-Leach- Bliley, financial institutions have a carveout where they treat data differently. In a way, financial institutions, and frankly all sorts of institutions, if they were looking at their balance sheet, they might treat their dataset as a valuable asset. Consumers, however, don't necessarily realize that some places they are considered to have a property right in their data. Is it an asset for both? And as people give up this data, one of the concerns is, how do we reconcile the de facto impact of GDPR and the looming patchwork of privacy laws coming in the United States and Congress' failure to act on privacy with that framework so that consumers can control their data some and not find themselves, well, wait, I was denied credit. Well, yes, you blocked all access to your background, if you go to the far end. And on the other hand, the idea that, gee, if you click these terms and conditions, anything that is in it is fair game. How do we regulate privacy in this space with respect to credit? Mr. Rieke. That is a great question. I think the FCRA is a strong start. If you squint at the text of the FCRA, what comes out of that is if your data is used for important eligibility purposes, certain rights and protections attach. Now, the FCRA is pretty old now. And as Ms. Wu said, if I am giving permission to Facebook to hand my data over to a lender, it is questionable whether that framework would attach. But I think looking at the spirit of the FCRA, which was created especially for these concerns and were some expansion so that statute might make sense for the digital age, would be where I would start. Mr. Davidson. All right. Thank you. My time has expired and I yield back. Mr. Scott. Thank you. And now the gentlewoman from Virginia, Ms. Wexton, is recognized for 5 minutes. Ms. Wexton. Thank you very much. And thank you to the panelists for coming today. This is really fascinating, and you are giving us all a lot to wrap our heads around. Mr. Girouard, I am really interested in your model and especially the fact point--the datapoint that it reduces interest rates by 5.42 percentage points and approves 95 percent more consumers in that near-prime area. What kind of response are you getting from lenders about your model? Are they enthusiastic about it? Mr. Girouard. By lenders, do you mean banks we partner or mean to partner with? Ms. Wexton. Yes. Mr. Girouard. Thank you, Congresswoman. I would generally say there is a lot of excitement about the potential for a model like this to be able to serve more customers, to be able to build on their side, lower the risk of lending. A more accurate model is intuitively compelling to a bank officer. Having said that, there certainly remains a lot of concern about regulatory uncertainty. And there is not in any sense a clear-eyed statement or a sense from the regulators how to think about this area of technology to a bank. A no-action letter that we received from the CFPB is a great start. It is not by any sense a panacea, because there are many other regulators. There are many limits to a no-action letter, so there is plenty of room for either regulatory action or rulemaking to provide more clarity. Ms. Wexton. I understand that there is some question about regulatory certainty. But are the lenders willing to accept that your model is a more accurate credit reporting model? Mr. Girouard. I think I can comfortably say yes. I am almost universally seen acknowledgment that our model is more accurate and more inclusive. Ms. Wexton. Okay. And Ms. Wu had indicated that one of the things that we should consider is making any of these alternative datapoints that are being used for credit to be considered as a report under the FCRA. Would that impact your ability to create this algorithm, or is that something that would not be an issue for you? Mr. Girouard. FCRA is to cover third-party data, data reported to--and then can be shared with a lender. And that is one part of our data. The other part, which is important to us, is the data that a consumer, with our consent, with their consent, submits to us. And again, that can be--if they are stating their income to you. That is not something generally a credit reporting agency has information on. There will always, at least in my mind, be two paths for data to come to a bank and a lender, one through FCRA-related data, through credit reporting agencies, and the other provided by the consumer themselves. And they are both important. Ms. Wexton. Okay. Thank you. And, Ms. Wu, you had also indicated that there should be an opportunity for consumers to opt out of these alternative datasets being used for credit purposes, is that correct? Ms. Wu. Thank you for the question, Congresswoman. I actually would urge that it would be an opt-in process, that any time you are creating these large new datasets, consumers give their written authorization to have their utility or their bank account information included, to be considered. Ms. Wexton. So, they would have to affirmatively opt in-- Ms. Wu. Yes. Ms. Wexton. --and then get it used. Okay. And I guess a part of that would be a declination or a refusal to opt in could not be used against them, right? It wouldn't factor into the algorithm, but it wouldn't be down counted for not-- Ms. Wu. If they already have a traditional credit file and score and they decline to opt in to alternative data, we would say the lender should go ahead and use the traditional credit score. If they don't opt in, then the data can't be used, obviously. Ms. Wexton. All right. Ms. Johnson, as a law professor, I know that you are familiar with the difference between de jour discrimination and de facto. Is there a way to be proactive in this space and make sure that we don't end up with de facto discrimination in these algorithms, or is it always going to be retrospective, looking back and seeing what the analysis provides us? Ms. Johnson. Thank you for the question, Congresswoman. I think that there is a way for us to be thoughtful in advance of the release of these types of products in financial markets. I think earlier, Chairman Lynch referenced the ``move fast, break things'' mantra that was adopted by a number of technology firms, and now as fintech firms are entering into spaces and operating, as Mr. Girouard mentioned, without clear regulatory guidance, there will be a temptation to use information or data, alternative data, to facilitate what may be faster, more efficient, lower-cost credit evaluation processes. We do have some knowledge in advance of the types of data that tends to lead to bias or discrimination, based on a long history of legislation and court decisions and agency actions in this space. I think one of the things we can do is really identify red flags and target areas. Some of the data Ms. Wu mentioned earlier and has been talked about over the course of this hearing, that it is useful and be thoughtful about would be rental payment history, but there are any number of reasons why--and Ms. Wu's organization and others have thought about-- that information may disadvantage or utility bill payment may disadvantage certain-- Mr. Scott. Ms. Johnson, the time is running out. Ms. Johnson. Thank you very much. Ms. Wexton. I yield back. Mr. Scott. Thank you very much. The gentleman from Missouri, Mr. Luetkemeyer, is now recognized for 5 minutes. Mr. Luetkemeyer. Thank you, Mr. Chairman. Mr. Girouard, since all banks are required to follow the ECOA and you partner with a lot of banks, what due diligence and ongoing monitoring does your company provide your bank partners to ensure that 100 percent certainty for those banks of no fair-lending violations? Mr. Girouard. Sure. That is a very good question. For sure, providing this technology to banks is not for the faint of heart. There is what I would say is a process of probably more than a year of them getting to understand and do diligence on our processes, fair lending being just one of many, to make sure that loans originated using this type of system are within the law. And also, of course, that the creditworthiness is real, the efficacy of the model is real. So, there is real, significant work before anything happens, before any relationship is signed. After the fact, there is a constant reporting and auditing like function. The same report that we provide for CFPB for all loans, we can do for an individual bank. And that gives the bank comfort that we are actually monitoring on a regular basis to make sure the loans originated in their name, under their charter, are within the bounds of fair lending regulation. Mr. Luetkemeyer. I would like to follow up on the previous colleague's questions here with regards to the no-action letter. I am assuming that because you have a no-action letter, it is very helpful when you go approach other banks to become partners with them. Because it would sort of seem like you are--it is a get-out-of-jail free card from the standpoint that you have already been sort of preapproved by CFPB, that the modeling you are doing is something that falls within the guidelines of everything. How important is that no-action letter whenever you start negotiating with the other entities? Mr. Girouard. It is certainly very important. And the reason we were willing to invest information and be as transparent as we were for several years with CFPB, I think, it is important because it demonstrates to banks that we are not a ``move fast and break things'' company. That may be the name-- or sort of a label you want to paint Silicon Valley startups with. But we are not in that class. We are a company that takes regulation and working transparently with regulators seriously. However, as I said earlier, it is absolutely not a panacea. They care about the FDIC, they care about the OCC, they care about State regulators, all of whom could decide to accept the CFPB's no-action letter and its conclusions or could choose not to. And that is why I think ultimately it is important to clarify regulation. Mr. Luetkemeyer. Why do you think more entities like you have not gone the no-action letter route? There are not very many, if any, that have done this, is that correct? Mr. Girouard. There is none other to date, as far as I am aware. Mr. Luetkemeyer. Why do you think that you are the only one that has done this? It would seem to me to give you a marketing advantage from the standpoint--if I am a bank and you come to me and you say, look, I have already had my modeling fall within the guidelines of the CFPB and all of the other entities out here that are regulating this, and I will continue to put these processes in place to protect the integrity of our data, it looks to me like you have to a win/win there. Why is there nobody else doing that? Mr. Girouard. My only conclusion I can draw from that is one of a few things. Number one, they are not actually using alternative data in a meaningful way. Number two, they are using it, but they have found another way, another path to creating comfort that they are within the bounds of fair lending laws. Or, three, they are using it, but they are not using it responsibly. And I don't necessarily know which of those is the answer. Mr. Luetkemeyer. Very good. Mr. Evans, your testimony points out that CFPB has developed fair lending examinations related to credit models and the Federal banking regulators have issued guidance to the depositor institutions on third-party or vendor management, including fintechs. However, despite this regulatory framework, there seems to be a disconnect between lenders and fintechs and the regulators that provide uncertainty in the fintechs' place. Can you explain this? Mr. Evans. Well, yes. And I think it goes back to ultimately the fragmented nature of the regulatory system. Fintechs experience uncertainty in that regard, because there are a number of actors in that particular space. CFPB's position on one thing may differ from the Federal Reserve or the OCC's position. And so oversight of fintech lending requires significant coordination. And the knowledge- building initiatives that I talked about in my opening statement would allow regulators to really understand the fintech products and ensure that the regulatory framework is adaptable and flexible. Mr. Luetkemeyer. Okay. Very good. I see that my time has expired. Thank you. Thank you, Mr. Chairman. Chairman Lynch. The Chair now recognizes the gentleman from Texas, Mr. Green, for 5 minutes. Mr. Green. Thank you, Mr. Chairman. And I thank you and the ranking member for hosting this hearing. I would also like to thank Mr. McAdams for allowing me to proceed at this time. In fact and in truth, it would be his turn, and he has allowed me to have the opportunity to proceed. I would like to move first, if I may, and rather expeditiously to Mr. Girouard. Sir, in the model that you currently utilize, do you maintain the traditional credit score and then do you add these other, what you are calling, alternative datapoints to the traditional score? Mr. Girouard. We do. We vary--we use FICO score. We use-- Mr. Green. That is going to be enough, because I have a lot to cover. I appreciate it. Mr. Girouard. Okay. Mr. Green. Thank you. I don't mean to be rude, crude, and unrefined. Mr. Girouard. Not at all. Mr. Green. Okay. Thank you. Friends, I started with Mr. Girouard for a reason. What we are calling alternative data, in most circumstances--there may be some that I am not covering--is really additional data. It is additional data. My bill that I have is not about alternative data, alternative meaning one or another. It is about additional data. It is about what Mr. Girouard does when he takes the traditional data and then he adds what we are calling alternative, but it really is more data that we are adding. We are not leaving out the traditional scores. My bill does not require consumers to opt in. Consumers do this of their own volition. They can allow their additional data to be scored, and it can help a good many consumers, as evidenced by what Mr. Girouard has called to our attention. The bill is a bill that has metamorphosed. I confess that initially we used the term, ``alternative,'' but we soon realized that when people heard the term, ``alternative,'' they assumed that we were somehow going to negate what was already there as a traditional score. Now, understanding that we are talking about additional--we are talking about the utilities, we are talking about the rent, but we simply added to what is already there, and in doing this, I think we will give many consumers the opportunity to own a home, and to make purchases that they would not ordinarily be able to make. Those that don't opt in will not be--they won't have that traditional score in any way encroached upon, infringed upon. It won't have an impact on that. Only those who opt in. With that said, I want to give you an opportunity to ask me a question. Let's turn the tables, if you don't mind, so that we can become as clear as possible, perhaps perspicuously, so that there is a better understanding of what this bill is about. I am not going to debate persons who want to have an alternative credit scoring model. That is perfectly acceptable to me. I would only suggest that if we focus on this bill, that we use the term, ``additional credit scoring.'' Questions from any member of the panel, please? Ms. Johnson. I have a question actually. Mr. Green. Thank you. Ms. Johnson. And Mr. Girouard may answer it, but it grows directly out of your question. Thank you, Congressman, for inviting us to ask. In the first instance, we have described credit invisibles as those who do not have a traditional credit score under the FICO criteria. To the extent that inclusion is our goal, which I think is bipartisan motivation for the committee and our thoughtfulness today--if inclusion is the goal and the idea that you propose is that alternative data is additional data supplementing an already robust methodology for analyzing consumer--the likelihood of consumer default or predicting creditworthiness, I am not sure I follow how credit invisibles are actually captured if the data that is being used is not the primary source of evaluation. Mr. Green. If I may answer, because there are only 32 seconds left. You could be a great Member of Congress, by the way, with your question. Here is how they are captured. Because they can opt in. And if they have nothing more, that will be there, plus the nothing, plus the something. I hate to be so elemental with the explanation. But what I want to do is make it as clear as possible that what we are doing is leaving the traditional, whatever it happens to be, and then we bring these additional points of data to the scoring process. Now, given that my time is almost up, and by some standards up, I see-- Mr. Scott. Will the gentleman yield for a moment? Mr. Green. I will yield and beg that the Chair would not look at the clock, if you will, please. Mr. Scott. Okay. Very quickly, I think another part of this-- Chairman Lynch. The gentleman will suspend. We can't be doing this. You are over. If the gentleman wants to conclude his thought, he can, but-- Mr. Green. I can't yield? Chairman Lynch. The gentleman's time has expired. I'm sorry. The Chair now recognizes the gentleman from Ohio, Mr. Gonzalez, for 5 minutes. Mr. Gonzalez of Ohio. Thank you, Mr. Chairman, and Ranking Member Hill for holding this hearing today, and thank you to our witnesses. I believe this area is an incredible opportunity to explore how new technologies can be deployed to allow more Americans to gain access to credit. That is sort of the promise or the hope, anyway, of the machine-learning technology. And I share the sentiment that Ms. Johnson just raised, which is the goal is to expand credit to as many Americans as possible. Mr. Girouard, I want to focus on your company specifically in the context of the sandbox. And so, we will go there. Bear with me for a second. You were founded in 2012, according to Crunchbase anyway, and have raised, I think it was $144 million in total funding. At what point did you start working with the CFPB directly in the funding stream? Mr. Girouard. I believe our first meeting with the CFPB was either in 2012 or 2013, about that time. Mr. Gonzalez of Ohio. Okay. So really, from the beginning, this was a concerted effort and a decision on your part? Mr. Girouard. That is correct. Mr. Gonzalez of Ohio. Okay. How big was the A, if you are-- I don't know if you are allowed to share that, but-- Mr. Girouard. I'm sorry? Mr. Gonzalez of Ohio. How big was the series A run, roughly? I will tell you where I am going so you can maybe answer this. I want you to talk about the benefits of the sandbox in terms of allowing for more startups to enter this space. Because you talked about the big banks potentially being able to get into it. But I want to see more innovation. You guys have an incredible team. I was on your site, a bunch of ex- Googlers and very smart folks. I know there are plenty of folks in Silicon Valley who would love to get into this space. How would the sandbox enable that? Mr. Girouard. The sandbox brings some clarity, which tends to make the money flow in terms of these companies, first of all, more entrepreneurs wanting to enter this space. When you have a very highly regulated area with a lot of confusion, most entrepreneurs will opt for something else. If you want more entrepreneurial effort in this area, bringing clarity will bring both the interest of the entrepreneurs and the money from the investors, and that will create companies that are going to make a difference over time. Mr. Gonzalez of Ohio. So, one of the benefits of the sandbox is not just that it gives Wells Fargo a chance, but that it gives the next group of startups a chance as well? Mr. Girouard. Without question. Mr. Gonzalez of Ohio. Great. And then I want to shift to some of the data privacy laws that you have kind of alluded to as well. California's privacy law is going to be coming into effect. And we hear a lot throughout the industry about the problems that is going to create. Can you comment on how you see it affecting your business specifically and AI in general? Mr. Girouard. Sure. I believe there are real issues related to privacy and large technology companies that need to be addressed, and I know are being addressed. And I am very appreciative of our home State, California, taking the lead on this. We are, of course, already preparing, reviewing, and planning to adapt our practices, our product, to the California law. What I would just generally add, of course, is a business like ours operates at a national level, so it would certainly be a step forward for us to have something of that sort, sort of managed at a Federal level more than at a State level. But having said that, we appreciate that is not the way the world works, and we will adapt to California's law. Mr. Gonzalez of Ohio. Yes. I think one of my concerns--and, again, that I keep hearing is when you have this patchwork of 50 different State laws and you want to operate all over the country, as does everybody, you are creating--not you--but California has created a bit of chaos. And I know one thing this committee is committed to is to solving that, which I am excited about. And then I guess kind of with my last question, as we are thinking through what that national standard should be, what is it about what the California law that you like, and what is it that you think should be changed or different? If you are not comfortable answering, that is fine. Mr. Girouard. I am not sure I am comfortable enough to try to state that here. Thank you. Mr. Gonzalez of Ohio. Okay. Thanks. With that, I yield back. Thanks. Chairman Lynch. The gentleman yields back. The Chair now recognizes the gentleman from Utah, Mr. McAdams, for 5 minutes. Mr. McAdams. Thank you, Mr. Chairman. I want to thank the panelists for being here today. And I care deeply about expanding financial inclusion. But I want to make sure we are supporting an environment where all Americans can access credit. I do know that credit decisions can mean the difference between a family qualifying for a home or a loan to buy a car and the incredible life consequences that those decisions have for each and every potential borrower. We need to have appropriate consumer protections, and consumer protections shouldn't be ignored while we get the dial right to maximize the benefits while minimizing any potential negative impacts. But I want to zero in on that balance, the potential benefits and the potential harm or questions that are raised from the use of alternative data. First, speaking towards the benefits, we have heard testimony today that these alternative data factors are giving lawmakers more confidence in who they can responsibly lend to, meaning more consumers have access to credit, ideally at competitive rates. My first question is to you, Mr. Girouard. What percentage of your loan portfolio would you estimate that your company can make loans to because of the inclusion of alternative data sources? Or stated another way, if you were only allowed to use traditional data sources, what percentage of your customers would you not be able to lend to because you couldn't assess their creditworthiness? Mr. Girouard. Thank you, Congressman. That is a great question. That is exactly the data that I presented in my up-front statements. What the CFPB asked us to do is to look at our model, if we removed all what you might call alternative data and used only traditional data. The difference is, among the general population, we described as--and this is among people who have applied for loans at Upstart--is about 27 percent. More people are approved because of the alternative data. But importantly, when you look at the near-prime segment, which is people with somewhat lower FICO scores, it is a 95 percent increase in approvals. So, it is a very significant difference in improvement on who we can approve due to the alternative data that we include. Mr. McAdams. Thank you. And further on that point, some alternative data factors are now being used to include--or maybe not furthering the point--but in a different direction. Some of those alternative data factors are now being used to include online behavioral data such as online shopping habits, and social network connections. My next question is for Mr. Rieke. I believe you made this distinction in your testimony between the types of datapoints and the conventional alternative data. Out of curiosity, how much of these alternative data sources are moving the needle on a credit score? And I am not referring to alternative data such as bill payments, or online utility payments, of which I think most Americans would intuitively understand why that could be included in this credit score. But the online shopping habits, social network usage, how much does that affect an individual's data score? Are we talking 5 points of credit? One point? Fifty points? And for someone who has a thin credit file, how much are these factors weighted compared to traditional data factors? Mr. Rieke. The short answer is, we don't know. Most of the fringe alternative data that has to do with social media and shopping habits and web behavior, there is a lot more hype than reality, in terms of what I have been able to ascertain in our research. There are a lot of start-up companies making some pretty strong claims to the media, and then maybe once they hire a lawyer kind of backing off of those or starting to practice overseas. And so there is some academic research studies that showed web signals like what website you come from, whether you are using an iPhone or Android phone, can really help kind of narrow in on what kind of person you are, mostly because those are proxies for wealth. But in terms of the real science and research around the predictiveness of fringe alternative data, it is really hard to say, because companies hold that data close, and I think there is a lot less of that really happening in the United States today because of issues with the ECOA. Mr. McAdams. Do consumers understand what information on them is being collected and used in their credit decisions, and are there industry standard practices on disclosure? Mr. Rieke. I am not aware of any kind of formal industry standard best practices. There are some private businesses, like Credit Karma, that do, in my view, a pretty good job of showing the basic FICO score factors and helping people make sense of that. I have seen nothing resembling that for more complex or fringe datasets. Mr. McAdams. Ms. Wu? Ms. Wu. If I may address that, Congressman, the Fair Credit Reporting Act and the Equal Credit Opportunity Act do require that if someone is turned down or priced higher for credit, a notice goes out explaining what the reasons were. That is really, really important because of the impact these decisions have on people's lives. One of my concerns is with machine-learning and AI, where the machine itself is determining what factors to use. How do you make sure consumers have adequate information about what is going on inside the black box? The other thing that I wanted to quickly mention is another type of nonfinancial data that is being used, and Upstart is using, which is education. And I worry about the impact of using education as a form of alternative data. Because we know of the great inequality and racial disparities in terms of what kind of degrees people get. Mr. McAdams. Thank you, Ms. Wu. My hope would be that we can use this data to not only expand access to credit for more individuals but it can also be used as a form of improving financial literacy, if individuals know what data is being used and what things they might do as individuals to move the needle as well. And hopefully, that doesn't include unfriending their friends on Facebook. Thank you. And I yield back. Chairman Lynch. I thank the gentleman. The gentleman from Florida, Mr. Lawson, is now recognized for 5 minutes. Mr. Lawson. Thank you, Mr. Chairman. And I welcome the witnesses to the committee. You might have already responded on this particular issue, but it is important to me. As most of you know, credit reports do not tell the full story of one's economic status. As a matter of fact, they could have a false narrative, depending on the circumstances. It is estimated that the use of alternative data such as utility payments, rent payments, cellphone payments, and other forms could expand access to credit to over 40 million consumers here in the United States. Can everyday payments such as rent payments or cellphone payments paint a more accurate picture of someone's ability to pay? Are we headed in the right direction by saying that this would be a true picture of the individual's ability to get credit? And everyone--all of you, if you care to respond to that, it would be great. I would just like to know--and you might have already talked about it. But this is talked about all over the place, especially in Florida, where we have a high concentration of students in my district, about 80,000 or 90,000 of them. So, I am anxious to know what your statement is going to be. And will I tell you, the reason being is when I was coming out of college, I was given all of these credit cards, Exxon, all of them, and so I started using them. And because the invoices, I guess, were going to the dormitory where I used to live, nobody forwarded them to me. When I got ready to try to get a loan or do some other thing, it came up. And it had been over 1 year or 2 years or so. And I just thought maybe, because I had graduated from school, they just gave me free credit. I didn't know. And that is one of the things that affects a lot of students, because they move around to different places. That is the reason I wanted to bring that question up and have all of you respond to it. Ms. Wu. Congressman, that is a great point. And you are absolutely right. Traditional credit scores and credit reports often don't reflect the true financial behavior of a consumer, precisely because of things like your experience or the fact that there are a lot of negative marks for things like medical debt, where people got sick and debts were sent to debt collectors. And we know that even among people with a subprime score, most of them, if you give them credit, will pay it back. Something like 80 percent of consumers who score a 600 will pay it back. So, alternative data could be useful, especially things like bank account data or rent, and if people choose, if consumers want to supply their utility and cellphone payments. Again, the devil is in the details; how you do it is important. Second-chance scores are better than putting this information in the traditional credit reports. We are concerned about factors that lead to more inequality or reflect inequality. As Mr. Rieke said, using geographic neighborhood or using what kind of degree you have, because we know that over 36 percent of non-Hispanic whites have a college degree, but less than 16 percent of Hispanics and 23 percent of African Americans do. So, if you use whether or not a consumer has a college degree, it is going to have some stark racial disparities. Mr. Rieke. Congressman, I want to just say I think the question of ability to repay is a really good target for this. We are talking about expanding access to credit, but we are not doing anyone any favors by giving them predatory products or too many credit products. That can destroy lives. So, I think ability to repay is a really important nexus between this question of alternative data and what are we trying to find out, but also a pretty strong consumer protection standard. Ms. Johnson. And I would just echo the earlier reflections. Thank you, Congressman, for this very important question about a really important demographic: students. We know from the New York Federal Reserve that households face $13 trillion in debt as of the end of the year, fourth quarter 2018, and $1.5 trillion in student debt. Student debt for a particular population, and most recently graduated generations of students, is staggering and crippling. And unlike past generations, these students are moving out of their parents' houses later, and they are having extended job searches. So, the predatory credit card tactics, the idea of drawing them into spaces where their credit histories will be marred, or they won't have credit histories at all because of how long it is taking them to dig themselves out of educational debt, really does prompt a need, a very significant need for alternative mechanisms, pathways for them to gain access to credit. I think we are all just thoughtful about how to do that in a way that is effective for consumers, protects their privacy, and is thoughtful about discrimination. Mr. Lawson. Mr. Chairman, I know I am out of time, so I yield back. Chairman Lynch. I thank the gentleman. We have agreed to just do one more brief round of questioning, so I yield myself 5 minutes for questioning. In our discussions with Facebook, in an effort to try to get some accountability on the protection of personal financial data, the issue of assigning fiduciary responsibility for the handling of information was suggested. And I would say that the response from Facebook was evasive, to be generous. What about that concept that there would be liability for mishandling the financial data that we surrender to fintech companies? Is that something that is workable, do you think, Ms. Wu? Ms. Wu. I thank you for the question, Chairman Lynch. I think that whether you call it a fiduciary duty, or you have legal duties or legal accountability for losing someone's data, there should be a regulatory scheme in place that holds Big Data companies, whether they be credit bureaus or Facebook, to accountability for losing sensitive personal information and data. Chairman Lynch. Yes. I guess I should just put a finer point on that. When I say ``fiduciary'', I mean in the classic financial services sense where a fiduciary is required to handle that information in the best interest of the customer, and not sell it or deploy it for other purposes. That is what I am getting at. I am trying to make sure what happens with personal financial data is not what happened with general data that is being vacuumed up and used and deployed without the knowledge or consent, meaningful consent, of individual consumers. That is what I am trying to get at. Ms. Johnson? Ms. Johnson. Yes. I'd just say thank you, Congressman. We have examples and models of how to protect financial transaction data that exist in current regulation. The Gramm- Leach-Bliley Act, for example, specifically requires that financial institutions disseminate initial and annual privacy notices to customers regarding financial transactions. The provision of the Gramm-Leach-Bliley Act that I am describing enables consumers to specifically opt out in certain instances of other uses of financial data. It also requires financial institutions to anonymize data, essentially to the extent that they use data for other purposes, to aggregate the data and ensure that the data is anonymous and not directly reflective or you couldn't easily discern that it refers to a particular consumer based on the profile. Now, I will say that data scientists at Princeton and Stanford recently published a study illustrating that they could successfully decode, if you will, anonymized data and establish users' identities based on social networking profiles. The idea that this could happen is obviously concerning and gives us pause. But I do think that we have some examples in existing legislation and regulation that could offer a point of departure for having a conversation about how to create accountability, responsibility, and transparency for anyone who--or entities who are gathering, storing, and distributing personal consumer financial information. Chairman Lynch. Great. Let me just jump over to Mr. Girouard. I pulled up Upstart's terms of service agreement. And it is a lot shorter than Facebook's. Thank you very much. It is about 8 pages. But there is one section in here on limitation of liability. And it says the customer--``you agree that all access and use of the site and its contents and your use of the products and services is at your own risk.'' In no event shall we or any lender be held liable for any damages, including direct or indirect, special, incidental or consequential damages, losses or expenses arising in connection with the site or any linked site or use thereof or inability to use by any party or in connection, or for failure of performance, error, omission, interruption, defect, delay in operation, transmission, computer viruses, et cetera.'' It is very, very broad. And this is one of those things where you have to click, ``I agree.'' And either you agree to all of this or you don't use the site, you don't use Upstart. Is that fair to the consumer, do you think? Mr. Girouard. Chairman Lynch, I certainly wish we had a better option. But it is a complicated world. And certainly a business needs to protect its interests. Somebody could say the internet crashes and I was in the middle of getting a loan, and that just cost me my ability to buy a home or do something else. Chairman Lynch. This basically shuts off the consumer from any recovery at all under any circumstances. I understand cases like that where the technology breaks down, you could say in that case, we don't accept any liability. But in the terms of this, it is airtight where, you basically block off any type of accountability; you are beyond reach by this agreement. This is the type of thing I worry about. And I just-- Mr. Girouard. It is a fair concern. I genuinely believe we have the highest consumer ratings we have ever found in our industry in terms of our respect and the way we treat customers or prospective customers. Chairman Lynch. I appreciate that. I am just concerned that no one has any recourse based on the terms of this agreement. With that, I yield to my friend, the gentleman from Arkansas, for 5 minutes. Mr. Hill. Thank you, Mr. Chairman. Just following up on that, Mr. Girouard, that particular thing he read, which obviously we haven't read, but I admired him in real-time going to your website--and it is a thing of beauty. And that is the difference between the House and the Senate, Ms. Johnson. You seem rather concerned about our technological capabilities here. That is really talking about your--the connectivity between the customers and you, isn't it, protecting you from liability, from the internet or from the website or the connection? Isn't that what that is mostly addressing? Mr. Girouard. Certainly. Any commercial agreement between a consumer and a business has to have reasonable protections in it. I am not an attorney, let me just admit that. So, for me to say what is an appropriate limitation of liability is not something I am probably equipped to speak about today. Mr. Hill. But we appreciate that. And that is something that we all deal with in any kind of commercial transaction. And I think it is made worse sometimes over the internet, because you don't have any kind of face-to-face explanation and it is a little bit more passive. But I think making sure consumers know what they are getting into is important. Mr. Evans, I wanted to ask you. I read your testimony-- thanks for it--about this harmonization between the regulatory agencies. You have urged them to adopt a harmonized approach to guidance under use of alternative data and also on the sandbox issue. Did they give you a timeframe when they would have a harmonized view on that? Mr. Evans. They did not. They all agreed with the recommendation and appreciated the spirit of it. Mr. Hill. Right. I think that is something we have all talked about here. We will be certainly pressing them for this more unified approach on vendor due diligence and an IT exam, guidance on what is an appropriate bank risk profile in this arena, how to do the board review of vendor due diligence. All of this is important. Mr. Evans, did you, in your work on this, see any reason to make statutory changes to the Fair Credit Reporting Act or the Equal Credit Opportunity Act? Mr. Evans. There are certainly some issues. The scope of the work didn't allow us to rigorously collect all the evidence for us to provide a conclusion on that, but for sure, the complexity of some of the algorithms could limit the type of information that a company is able to provide if they were to deny credit to an individual. Mr. Hill. Yes. I read the reliability of data point in your testimony, and we have talked about that with other witnesses at previous panels, with just asking the simple question, using an AI-based model, a machine-learning model, that uses additional data, just as Mr. Girouard has described, we have asked the question, is it auditable? And in the instances that we have had, the answer has been consistently yes. And the evidence of that is not hypothetical because the loans originated are subject to a fair lending exam by a commercial bank or portfolio buyer. And then, of course, in Mr. Girouard's case, they are also auditable by the CFPB's analysis of this data. So, as long as a commercial bank is a partner in it, from my point of view, that seems like the disparate impact test, the HMDA test if it would be a mortgage, or fair lending, or equal opportunity type assessments would be made. Is that generally your view from the work that you did? While you may have found six industry stakeholders who you had concerns about, it is doable to validate a model and have an audit trail as to how the determination was made, isn't it? Mr. Evans. In the models that we considered, I would say yes, but I would say our work was limited to the fintech companies we actually talked to. There could be classes of models that-- Mr. Hill. Yes, but the obligation is on that user, that innovator, whether it is a bank partner or a fintech nonbank partner, to demonstrate that they comply with all the compliance obligations of the Federal Government. Mr. Girouard, you have said already, it is auditable, and the CFPB audits it, and then your bank partner audits it. That is correct, right, you can validate your model and backtrack it? Mr. Girouard. That is correct. Mr. Hill. And one question that didn't come up today--I didn't hear it--is back-testing. We have had the most ideal circumstances of the past 11 years, thanks to the unbelievable policies of our Federal Reserve, so that we have a very benign interest rate environment, we have rising real wages, we have a rising economy. What about back-testing your $4 billion you have originated? Looking back under more adverse credit circumstances, what have you learned? Mr. Girouard. Sure. That is a valid concern, and certainly any lender, to earn its stripes, really needs to perform through an economic cycle. First, we test the best we can by simulating higher unemployment. So, there are ways we can simulate higher unemployment and look at the impact we expect it to have on our loan portfolio. Second, because there actually are recessions, what I might call microrecessions in parts of the country, small parts of the country, we can actually look at loan performance in those particular areas. It is not a perfect proxy, but it is a way to understand how our loans would perform in a weaker economy. Mr. Hill. I thank the panel, and I yield back, Mr. Chairman. Chairman Lynch. The gentleman yields back. The Chair now recognizes the gentleman from Georgia, Mr. Scott, for 5 minutes. Mr. Scott. Yes, Mr. Lynch, this has indeed been a very, very informative hearing, and our panelists are well-prepared and very informative. Thank you for this. As I said in my opening statement, we are at a new frontier here, and it is an exciting frontier. But let's go back to the alternative data because I think that is really the fundamental foundation of this hearing. Now, there are different kinds of alternative data that I am hearing. So, you may say a utility bill, or you may say your online habits, or you may say your educational attainment. Tell me, how does a lender weigh these? Would they give more preference to your educational attainment? Does that have the same weight as your utility bill? How is it used by lenders when they are making these underwriting decisions? Let me start with you, Ms. Wu--or is there anybody who has an immediate answer to this? Or if we don't have an answer to it, don't you think we should? Mr. Girouard. I am glad to answer, Congressman, as one who does exactly what you are asking about. Traditional lending systems are what you might describe as rules-based. Okay? A series of, if the person's FICO is between this and that, if their income is between this and that, here is what we can offer them. That is what you might call a rules-based system. These newer models, what are sometimes termed machine-learning or AI, are far more sophisticated than that. What they really do is they look at the history of loans and the data that has come in about those loans, and it learns about how each of those factors actually impacted the performance of the loans. So, it is not a human sitting there trying to evaluate whether education or FICO or something else is more predictive. The software will learn over time what is the best combination of that information, that will be the most accurate model. The goal of a company like Upstart is to build a more accurate model, which tends to lead to higher approval rates, and we do that by relying on the software to do things that humans can't realistically do, which is to consider not two or three variables, but hundreds or maybe even a thousand variables, and that results in a more accurate credit model. And, fortunately, it also results in one that approves more people at lower rates. Mr. Scott. So, you are saying that the machine has a more accurate ability to give a certain alternative data more weight over the other? I guess what I am asking is, is there more benefit for one type of alternative data to be helpful to the unbanked or underbanked? There is a variety of things. Maybe also added in there, did he serve in the service? What was his rank? Was she a schoolteacher? What was the caliber of her employment structure? Do you see what I am saying? There seems to me that if we just put all this up to the machine, I am not sure it is giving it--there ought to be some weight here. Ms. Wu. That is a great point, Congressman Scott, and something I am concerned about. Because data that kind of looks like credit, as Mr. Rieke said, rent or bank account or utility bills, everybody, if they have a good history, can benefit from that. But if you are talking about things like education, how many college grads really are credit invisible? Are we really expanding access to credit if we say, we will give you a higher score if you graduate from college, especially if you graduate from an elite institution? Mr. Scott. Right. Ms. Wu. And then, in terms of machine-learning, one thing I want to add is, yes, it might be up to the lender to give that weight, but the lender has to be able to explain it. And if all this data is going into a big black box and the machine is deciding what is more important or not, you have to be able to put it on a piece of paper and explain to the consumer what was more important. The law requires it, because we need transparency in lending. Mr. Scott. Yes. Thank you, Mr. Chairman. Great panel. Mr. Evans. And so there is--I'm sorry. Chairman Lynch. If you can be quick, Mr. Evans. Mr. Evans. There is an important tradeoff to think about: transparency versus predictability. And that is something we have to grapple with and it is something about which the regulators can offer guidance. Chairman Lynch. Thank you very much. I appreciate that. The Chair now recognizes the gentleman from Florida, Mr. Lawson, for 5 minutes. Mr. Lawson. Thank you. Mr. Hill. Mr. Chairman, I need to just, I think, politely object. I thought we were going to do just ourselves for a final round of questioning, and I have no more Members here. And so, with all due respect to my friends, that is not really what we agreed to, so-- Chairman Lynch. Okay. I understand the gentleman is short on time, and I totally respect him, but when I asked for a second round, I meant a second round for the Members. Mr. Hill. But you said a second round for the two of us, sir. Chairman Lynch. Sir, I was not aware that that is the way you understood that. Mr. Hill. That is the way you said it, and that is the way I understood it. Chairman Lynch. Perhaps I meant the two of us, meaning the two sides. I know the gentleman had no other-- Mr. Hill. We have no other Members, so I think just in fairness under the rules, with the deference of Mr. Scott being the last questioner, that would be appreciated. Chairman Lynch. The gentleman, Mr. Green, has yielded and-- Mr. Lawson. I yield back. Chairman Lynch. --the gentleman, Mr. Lawson, agrees as well? Mr. Lawson. Yes. Chairman Lynch. Okay. Without objection, the Chair moves to include in the record of this hearing a letter from the Cato Institute, Center for Monetary and Financial Alternatives, dated July 24, 2019; a letter from the Financial Data and Technology Association, dated July 23, 2019; and also an article from the Student Borrower Protection Center, entitled, ``Educational Redlining: The Use of Educational Data in Underwriting.'' Without objection, it is so ordered. I would like to thank our witnesses for their testimony today. The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. This hearing is now adjourned. [Whereupon, at 12:12 p.m., the hearing was adjourned.] A P P E N D I X July 25, 2019 [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] [all]