November 10, 2021
Why is it easier for White people than for Black, Latino and Native American people, to get mortgages, and to get good interest rates on loans? Some of the answer is about economic racial disparities in income, wealth, and employment that impact applicants’ ability to pay back a loan. Some of it comes from lender bias, conscious or not. But some of it -- maybe a lot -- almost certainly comes from the methods that lenders use today to evaluate risk. Those methods are becoming obsolete, both in the original underwriting of the loan and again at the point where the loan decision is reviewed for compliance with fair lending laws.
This last problem may be poised for change.
My guests today are Lisa Rice, CEO of the National Fair Housing Alliance, and Kareem Saleh, founder and CEO of Fairplay. Lisa is a civil rights activist. Kareem is a tech guy who founded a startup that uses AI analytics to deliver what he calls Fairness as a Service. They come from two different worlds, but they have teamed up to work on the problem of unfair lending.
In our discussion, they tell the story of how they came together. It starts with Lisa’s organization suing Facebook over housing search algorithms that worsen housing discrimination. In settling the suit, Facebook agreed to monitoring, and Lisa turned to Fairplay to conduct it.
As the Facebook example illustrates, there’s no doubt that AI-driven decision making can worsen bias. That problem gets a lot of attention. Less appreciated, perhaps, is the that well-designed AI also has the potential to reduce discrimination. Furthermore, it can reduce it regardless of its origins -- whether the bias was created by another AI, or was created by the age-old problem of human attitudes and mistakes, or was created by archaic processes and tools left over from the analog era, before we had abundant, digitized data.
As Kareem explains, AI can be designed to optimize for the results we want to attain. He uses the example of driverless cars. If they are programmed to minimize the time spent traveling from point A to point B, they will probably break speed limits and traffic rules to do it. As a result, they need to be designed to optimize for compliance and safety as well as speed. The same logic applies to use of algorithms in credit.
In our conversation, Lisa talks about the landscape of housing and mortgage inequality, which, appallingly, is worse now than it was when Congress passed the Fair Housing Act over 50 years ago. She and Kareem talk about how this picture is changing and the opportunities to do better.
See the links below for other shows where we’ve explored doing better through modernized underwriting. The basic logic is that there are millions of creditworthy consumers who don’t fare well in traditional underwriting because current risk models look at only a small amount of information about them -- mainly credit history and credit scores -- simply because this is the only information that has been easy to obtain and evaluate. Digitization can now add far more data into the mix, at low cost. And AI can help analyze it quickly, inexpensively and, if done right, fairly. Kareem says lenders can double their approvals, with no loss of loan quality. That’s what you call a win/win.
For our regulators in the audience -- and I know there are huge numbers of you -- note that
Lisa raises a critical problem that will have to be solved: if these new tools will in fact correct for bias that has pervaded the system up to now, much of the industry will be afraid to adopt them, for fear that doing so will reveal discrimination in earlier lending. We have exactly the same risk emerging in AML, another area where vastly superior compliance tools are coming on stream, using better data and analytics. If the industry could do sharper, more inclusive risk assessment -- methods that would bring more, better loans to more people, correcting for structural bias while maintaining or improving loan quality -- it would be a travesty for the industry avoid it for fear that their regulators will punish them for past actions, ones that were undertaken what was the best available methods at the time (and were generally being used by the regulators too).
Lisa outlines some ideas for dealing with this almost inevitable problem. In my view, it will take proactive regulatory leadership to move the whole sector forward, and minimize the harm to consumers who can’t get loans or who pay more every month than they should, because our technology is stuck in the past.
My view is that this technology has more potential to close the stubborn racial credit gap than anything else on the horizon. That, in turn, could go a long way toward closing the racial wealth gap too. It could be the biggest step toward equal credit opportunity, and fair housing, since credit discrimination was first outlawed, a half century ago.
The possibilities are food for thought as you listen to today’s show!
More on Lisa
As President and CEO, Lisa Rice leads the National Fair Housing Alliance’s (NFHA) efforts to advance fair housing principles, preserve and broaden fair housing protections, and expand equal housing opportunities for millions of Americans. NFHA is the trade association for over 200 member organizations throughout the country and is the nation’s only national civil rights agency solely dedicated to eliminating all forms of housing discrimination.
Ms. Rice is a published author contributing to several books and journals addressing a range of fair housing issues including – The Fight for Fair Housing: Causes, Consequences, and Future Implications of the 1968 Federal Fair Housing Act; Designed for the Future: 80 Practical Ideas for a Sustainable World; Discriminatory Effects of Credit Scoring on Communities of Color; and From Foreclosure to Fair Lending: Advocacy, Organizing, Occupancy, and the Pursuit of Equitable Credit.
She played a major role in crafting sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and in establishing the Office of Fair Lending within the Consumer Financial Protection Bureau. She also helped lead the investigation and resolution of precedent-setting fair housing cases which have resulted in providing remedies for millions of people as well as the elimination of systemic discriminatory practices involving lending, insurance, rental and zoning matters.
Ms. Rice is a member of the Leadership Conference on Civil and Human Rights Board of Directors, Center for Responsible Lending Board of Directors, JPMorgan Chase Consumer Advisory Council, Mortgage Bankers Association’s Consumer Advisory Council, Freddie Mac Affordable Housing Advisory Council, Quicken Loans Advisory Forum, Bipartisan Policy Center’s Housing Advisory Council, FinRegLab’s Machine Learning Advisory Board, and Berkeley’s The Terner Center Advisory Council.
More on Kareem
Kareem Saleh is the founder and CEO of FairPlay, the world’s first Fairness-as-a-Service company. Financial Institutions use FairPlay’s APIs to embed fairness considerations into their marketing, underwriting, pricing, and collections algorithms as well as to automate their fair lending compliance.
Previously Kareem served as Executive Vice President at Zest.ai, where he led business development for the company’s machine learning-powered credit underwriting platform. Prior to Zest.ai, Kareem served as an executive at SoftCard, a mobile payments startup that was acquired by Google. Kareem also served in the Obama Administration, first as Chief of Staff to the State Department’s Special Envoy for Climate Change, where he helped manage the 50-person team that negotiated the Paris Climate Agreement, then as Senior Advisor to the CEO of the Overseas Private Investment Corporation where he helped direct the U.S. Government’s $30B portfolio of emerging market investments with responsibility for transaction teams in Europe, Latin America and the Middle East.
Kareem is a Forbes contributor and a frequent speaker on the application of AI to financial services. He is a graduate of Georgetown University Law Center and an honors graduate of the University of Chicago.
More for our Listeners
The speaking circuit has opened back up!
Watch for the video (and a podcast episode) of my Money 20/20 session with Matt Van Buskirk and the always provocative former acting Comptroller of the Currency, Brian Brooks, exploring where we’re headed with cryptocurrency regulation and defi. We got lots of great feedback, and even teased Brian’s plans to launch a TV series — basically Washington DC meets crypto!
This week I’m in New York speaking at the Linux/FINOS Open Source Strategy Forum, in a fireside chat with FDIC innovation head Sultan Meghji, on how open source will, and should, transform financial regulation. I think we’re going to say some things that neither of us has said before in public, so I hope to see lots of podcast listeners there! There may still time to register and join us in person!
I’m also speaking in New York at the global Swell conference, on fintech and financial inclusion.
Also watch for my fireside chat, virtually, at the Singapore Fintech Festival, with Indonesian Central Bank Governor Perry Warjiyo.
On the podcast front we have great shows coming up including one with Netherlands’ Queen Maxima, who is the UN Global Advocate for Financial Inclusion; one with Chris Giancarlo on his book launch, “Crypto Dad;” and one with the fascinating Hemant Taneja whose book, Unscaled, profoundly changed my thinking a few years back.
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And keep on innovating!
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