Barr Urges Lenders to Look Beyond Credit Histories in Second-Chance Borrowers

Federal Reserve Governor Michael Barr is urging lenders to consider borrowers with criminal records by using alternative financial data and artificial intelligence (AI) underwriting. Speaking at the Second-Chance Lending Forum in Washington, he noted that people with incarceration experience face significant barriers to mainstream credit despite showing a strong demand for financing.

Data from the Federal Reserve shows that these individuals are 16 percentage points less confident that their credit application will be approved but 10 percentage points more likely to have applied for credit in the past year than those without this experience. Barr emphasized the importance of distinguishing historical credit damage from a borrower's current ability to repay.

Cash-flow-based underwriting and alternative financial data, such as bank-account data, can provide lenders with information that traditional credit scores may not capture. This approach could help expand access for borrowers with thin or poor credit histories and identify those who are capable of repaying loans despite their past mistakes.