Fintechs have long used alternative data to assess creditworthiness — and now legacy institutions like Fannie Mae and Freddie Mac are being forced to do the same:
This is an excerpt from a story delivered exclusively to Business Insider Intelligence Fintech Briefing subscribers.
Fintechs, particularly alt lenders providing credit products like personal loans, have long leveraged alternative data. Fintechs likeleverage emerging technologies like AI and machine learning to introduce alternative data points into their credit scoring approaches to overcome limitations with existing methods, like FICO scores.
Given the fallout of the 2008 crisis and the nascent nature of alternative credit scoring, these methods still likely carry an air of risk — something regulators need to keep a close eye on. In part, the 2008 financial crisis was the result of credit scoring issues, where lenders lowered requirements and extended billions of dollars' worth of mortgages to subprime borrowers, resulting in substantial economic turmoil as the market went bust.
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