Fair Credit Reporting Act News
Difficulties and factors to be taken into account for businesses using alternative credit data in order to follow Fair Credit Reporting Act rules
Monday, November 4, 2024 - Many businesses are extending their credit evaluation tools as the financial sector changes by adding other data sources including rental payments, energy bills, and even behavioral data including social media activity. Often referred to as "credit invisible," these fresh data sources enable businesses to credit someone with little or nonexistent traditional credit history. Using alternative data, however, also presents compliance issues, especially in relation to the Fair Credit Reporting Act (FCRA), which controls consumer privacy, accuracy, and fairness of data. Enacted to guarantee accurate consumer credit data, responsible usage, and protection from abuse, the FCRA Companies starting to include alternative data into credit reporting have to think about how to apply FCRA rules--originally intended for conventional data sources like credit cards and loans--to this new information. Under the Fair Credit Reporting Act (FCRA), credit reporting companies are required to fix credit report errors that are disputed.
With alternative data that can lack consistent reporting or verification procedures, the FCRA requires that all information utilized in credit determinations be accurate and relevant--which might be difficult. Accuracy is a major worry about alternative data. While alternative data can be more erratic, traditional credit data is checked extensively to ensure legitimacy and reduce mistakes. For example, rental and utility payments could be recorded inconsistently; some suppliers just show good data while others add late payments. Companies who want FCRA compliance have to put mechanisms in place to confirm the completeness and accuracy of this data to prevent unfairly punishing customers. Errors in alternative data can provide inaccurate credit ratings, which would have possibly negative financial effects on people.
Consumer permission is another FCRA compliance issue with reference to alternative data. Companies employing non-traditional data have to make sure under the FCRA they have a "permissible purpose." This calls for openness, telling customers about the information gathered and how it will be applied. Unlike conventional credit data, alternative sources might not always fit credit-reporting rules, hence businesses have to aggressively notify customers and get permission. Effective communication not only promotes compliance but also clarifies for consumers how different data could influence their creditworthiness. Compliance with alternative data also depends critically on dispute resolution for FCRA. The FCRA gives consumers the ability to contest credit report mistakes, so businesses have to look at and fix problems right away. However alternative data sources like rental history or social media lack the consistent reporting systems employed by conventional credit data, hence dispute procedures for such data may be more complicated. Businesses using alternative data have to create strong procedures to properly manage conflicts, therefore guaranteeing consumers' equal protection independent of the data source. Using alternate data also begs privacy questions. Strict rules on data privacy and security established by the FCRA guarantee that consumer information is just available to authorized users. More sensitive are alternative data sources, especially those involving personal conduct or internet activity. Businesses must thus apply sophisticated security policies to safeguard this data, so balancing the demand for thorough credit evaluations with the consumer's right to privacy. Ignoring this information not only goes against FCRA guidelines but also puts businesses open to possible litigation and bad reputation damage.
