Technological Innovation in Creditworthiness Assessment

Consumer scores describe individuals or groups in order to predict, on the basis of their data, behaviors and outcomes. Scores use information about consumer characteristics and attributes by means of statistical models that produce a range of numeric scores, and they proliferate in day-to-day interactions: in the US only, roughly 140 scoring algorithms are implemented for a wide range of services, and the most advanced of them can elaborate up to 8.000 individual variables. In particular, credit-scoring systems are used to evaluate individuals’ creditworthiness for access to finance. Credit scores are implemented by both institutional operators and emerging P2P lending platform: a positive credit score represents an essential means for access to credit, and therefore as a tool for individual and social development. At the same time, not everyone can be allowed to access to credit under the same conditions: individuals and businesses shall be distinguished based on predictions regarding their likelihood to repay loans, and the characteristics of their credit shall be determined accordingly. When effective, good evaluations enable lenders to respond promptly to market conditions and customer needs: both lenders and borrowers stand benefits. These new forms of scoring provide an opportunity to access credit to transparent and unbanked individuals without a consistent credit history, promoting forms of inclusion. Nevertheless, they entail significant risks: lenders should be attentive to avoiding disparate impact and unfair outcomes, while at the same time considering how to comply with the obligations of disclosure and transparency towards consumers. Lastly, how these new systems (e.g. scores implementing aggregated data and scores based on indirect proxies for sensitive factors) fit in the current European regulatory framework is still largely uncertain. Striking the balance between conflicting interests and reaching the optimal level of access to credit poses a fundamental challenge for regulators. In order to provide a normative response to these concerns, the paper provides an overview of credit scoring algorithms and their role in order to promote access to credit and financial inclusion, comparing them with the already existing tools (such as the FICO score). Then, it investigates the similarities existing between the consumer-scoring systems and the activity conducted by credit rating agencies – subject to careful examination by regulators in the US and in Europe following the 2008 financial crisis) to develop a regulatory proposal. In particular (arguing in favor of an intervention by analogy), the research illustrates a tentative regulatory model taking advantage of the framework delineated by the Reg. EU/462/2013 for credit rating agencies as a matrix to develop specific obligations for companies involved in the development and use of consumer-scoring algorithms, ultimately allowing for information on credit scoring methodologies and relevant data to be monitored and audited by consumers and supervisory agencies.