Is a consumer with a FICO score below 620 actually a greater risk? How would you know? Evidence suggests originators can no longer rely solely on FICO scores to identify subprime borrowers or those with weaker credit prospects.
Alternative data, such as bank account/cash flow, rental payment history, professional licensing or education information, along with machine learning and artificial intelligence, are available to help gauge credit risk more accurately. But the use of alternative data carries particular legal risks. As credit performance softens across markets, and, in particular, for non-prime auto loans, non-compliance with law in the origination process could become the basis of claims by investors and other parties, if they start to incur losses.