June 12, 2019

Senator Warren Asks Regulators About Discrimination Built into Automated Lending Decisions

Research shows that lenders using algorithms to make lending decisions are charging Latinx and African American borrowers higher interest rates

Washington, D.C. - U.S. Senator Elizabeth Warren (D-Mass.), a member of the United States Senate Committee on Banking, Housing, and Urban Affairs, sent a letter to Chairman Jerome Powell at the Board of Governors of the Federal Reserve System, Comptroller Joseph Otting at the Office of the Comptroller of the Currency, Chairman Jelena McWilliams at the Federal Deposit Insurance Corporation, and Director Kathy Kraninger at the Consumer Financial Protection Bureau, regarding a recently-released analysis which found that the algorithmic models used by financial technology (FinTech) companies can result in discriminatory lending outcomes and overcharge borrowers. Senator Warren is seeking information about the role that the banking agencies can play in ensuring that lending algorithms serve American borrowers on a nondiscriminatory and fair basis.

FinTech companies provide a variety of payment services, individual and business loans, and financial advice, and they often use algorithms to underwrite their loans and help them determine whether a consumer is qualified to receive a mortgage, obtain a credit card, or open a bank account, and on what terms these services will be offered. Many of these companies issue loans without any in-person interaction between a lender and a borrower.

Traditional lenders are also increasingly using algorithms to supplement or replace their underwriting processes.
"While some FinTech products have the potential to expand access to financial services for underserved populations, we believe these new business models and products also present new challenges for regulators," wrote Senator Warren. "Recent research highlights this tension, demonstrating both the opportunity of algorithmic underwriting's potential to reduce discrimination, while also emphasizing the technologies' current shortcomings."

Researchers found that "algorithmic lending" appeared to reduce the likelihood that the loan applications of borrowers of color are rejected-thus reducing discrimination in lenders' "accept/reject" decision-making process. However, the same study also found that "FinTech lenders [using algorithms] charge Latinx/African American borrowers 6-9 basis points higher interest rates" than comparable borrowers - which is almost identical to the interest rate premium that minority borrowers face with traditional underwriting. In other words, the algorithms used by FinTech lenders are as discriminatory as loan officers. 

There are multiple fair lending laws and regulations in place to address lending discrimination. To understand the role that the agencies can play in identifying and combatting FinTech discrimination, Senator Warren has requested responses to her letter by June 24, 2019.