Fed Governor Points Lenders Toward Second-Chance Borrowers

Federal Reserve Governor Michael Barr has urged lenders to consider alternative methods for evaluating borrowers with criminal records, such as cash-flow underwriting, alternative financial data, and artificial intelligence (AI). At the Second-Chance Lending Forum in Washington, Barr emphasized that individuals with a criminal record face significant barriers to mainstream credit, despite demonstrating a strong demand for financing.

Federal Reserve data indicates that these individuals are 16 percentage points less confident that a credit application will be approved but 10 percentage points more likely to have applied for credit in the past year than those without such experience. Barr suggested that cash-flow-based underwriting and alternative financial data could help expand access for these borrowers by helping lenders distinguish historical credit damage from their current ability to repay.

Additionally, he highlighted the potential for small businesses owned by individuals with criminal records, estimating that about 1.1 million U.S. small-business owners have criminal records.

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