September 28, 2023
Today’s show is about how to solve the problem of credit discrimination, starting by thinking about it differently. The United States outlawed it a half century ago. The Fair Housing Act banned racial discrimination in housing, including in mortgage lending, in 1968. Six years later, Congress expanded the ban to cover all consumer credit and to add a bar against sex discrimination as well. Before these laws were passed, discrimination was not only common but also, often, overt, rationalized by the industry as necessary for prudent management of risk.
In the decades since, overt discrimination has disappeared in the U.S. and credit access has expanded. Many people assume, accordingly, that the problem is gone — that to the extent that lending patterns still show disproportionate credit denials and/or onerous terms for people of color, the reason is that these borrowers present higher risks, arising from factors like lower average incomes and savings, and more job volatility. Lenders widely view those issues as reflecting widespread societal disadvantages facing non-white applicants. They tend to see this as an unfair situation, but not one that credit providers can reach.
My guest today makes the argument that, to the contrary, the bias problem in credit markets is far from solved. Furthermore, she argues that it can be solved, if we do two things: understand the role of structured, hidden bias in the system and then use new technology to root it out.
Lisa Rice is CEO of the National Fair Housing Alliance. We’ve had her on the show before. I serve with Lisa on the board of directors of FinRegLab, and I’ve seen her speak many times on the issue of structural bias in mortgage lending and housing markets — in fact, I asked her to talk with our own team at AIR this year at a meeting we held in Washington. Every time I see her in front of an audience, I see a palpable response. Lisa takes an issue in which most people’s views hardened in place long ago, and she makes them think anew.
The fair lending challenge has been stuck in a political deadlock for years, with, in my view, the two sides usually talking past each other. Generally speaking, lenders believe they are conscientiously trying to assure that their credit decisions are objective and fair. As a result, they often feel that pressures to be more inclusive are basically pressure to make bad loans. (And, they point out, making bad loans harms borrowers as well as lenders). In contrast, many consumer advocates and policymakers believe that current loan standards are often unnecessarily stringent and result in many creditworthy people being unfairly denied access to loans for needs like home buying, funding a small business, or emergency cash.
This disagreement becomes even more contentious when it intersects with the issue of credit discrimination. Applicants who are excluded under today’s credit standards come disproportionately from groups that are protected from discrimination on the basis of factors like race, gender, religion, and national origin. That protection bans three types of discrimination – overt, disparate treatment, and “disparate impact.” The first two of these are fairly straightforward, but the third is harder to implement. What should happen when a lender – usually without meaning to discriminate – adopts loan terms or credit practices that treat all applicants exactly the same, but that nevertheless produce disproportionate adverse effects on the protected groups? The law says that lenders in such scenarios must be able to prove their business justification for the practice, and must also be able to show that there isn’t a less biased way to achieve it. As a practical matter, this justification process calls for a host of subjective judgments that can be very difficult to agree upon.
One way to build more agreement is to expand our shared understanding of the racial roots that underlie many common lending standards and practices. The people in today’s credit industry have no working memory of the days when, say, FHA’s written rules required appraisers to reduce the appraised value of homes based on race, or when overtly discriminatory standards were changed to facially neutral ones that still promoted the original goal of impeding lending to people of color. Lisa explains this history.
She also points to solutions that are becoming available through new technology. Creditors today can underwrite loans in new, more accurate ways, using more kinds of data and more sophisticated risk management analysis. These developments of course raise great risks that the new techniques – especially AI-based underwriting — will exacerbate financial exclusion problems by importing biased data and methods that will be hard for human reviewers to detect and address. At the same time though, if designed right, these developments are also creating huge possibilities for making lending more fair – more inclusive, and also more accurate.
This means that better data and technology are creating a chance for a rare win/win in the neverending tension between industry on one side and advocates and regulators on the other regarding fair lending. Among other things, more inclusive and accurate underwriting can help community banks “grow in place,” reaching new markets inside their own geographic footprints. It can also enable fintechs to play a positive role in financial inclusion.
If you put together Lisa’s insights and the new possibilities arising from new technology, you can start to envision a vastly better system, maybe even a system in which both lenders and advocates can actually agree on a lot of what should be done.
I’ll add a personal note. I started my career when some types of credit discrimination were still legal. I have worked on trying to eliminate it ever since, at HUD, as a U.S. Senate staffer, in two jobs as a bank regulator (including as Deputy Comptroller of the Currency), as a consultant, on the boards of multiple nonprofit organizations, as a senior fellow doing research at Harvard, and now as CEO of a nonprofit, myself. I saw striking progress in the early years, as the easiest things happened, like shutting down overt discrimination and then most kinds of disparate treatment. But at that point, progress stalled. It stalled decades ago. In my view, discrimination continues, and the overwhelming majority of it is unintentional. It’s embedded in practices that the industry — and many regulators as well — have considered prudent traditional risk management. And it’s been hard to disentangle it from sound practices because, until recently, we just did not have enough data and sufficiently sophisticated tools to really fine-tune risk models. Today, we do. I think today’s regulators have the opportunity to be the ones who finally solve the problem of disparate impact in lending. I’m also hopeful that, if they do it right, it doesn’t really even have to be a contentious process. We can finally fully realize the common sense that fair lending and good lending are the same thing.
As President and CEO, Lisa Rice leads the National Fair Housing Alliance (NFHA)’s 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 170 fair housing and justice-centered organizations and individuals throughout the U.S. and its territories, and is the nation’s only national civil rights agency solely dedicated to eliminating all forms of housing discrimination.
Lisa is a published author contributing to several books and journals addressing a range of fair housing issues, These include 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.
Lisa 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 legal 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. She serves on a range of boards and advisory councils.
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Our podcast queue is bursting with great new shows. We’re going to have former CFTC Chairman Chris Giancarlo back for an update on the latest in CBDC and stable coin regulatory trends. We’ll have a second show with Paula Hunter from the Mojaloop Foundation. If you missed hearing our 200th episode, please do check it out, and also watch for our upcoming show with Simone di Castri and Matt Grasser from the Cambridge Centre for Alternative Finance SupTech Lab.
Speaking of the Cambridge lab, our AIR team also put on a TechSprint with them in July, exploring how regulators can use chatbots not only to handle consumer complaints, but also to use the resulting data to identify trends in bad practices and illegality. We have other TechSprints in development – watch for more information.
In October I will be speaking at the National Bankers Association’s Annual Conference in Washington DC. The following week I will be in Las Vegas doing two panels at Money 20/20. At the end of October I’ll be speaking at the 4th National HBCU BlockChain and Fintech Conference, at Morgan State University in Baltimore. I’ll also be at the Singapore Fintech Festival in November, and much more. I hope I’ll get to see many of you face-to-face in my travels!
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