The National Community Reinvestment Coalition (NCRC) and six financial technology firms today asked the Consumer Financial Protection Bureau (CFPB) to provide guidance on how it will apply disparate impact rules to any systems that use artificial intelligence (AI), machine learning (ML), algorithms, or alternative data to make lending decisions.
A June 29, 2021, joint letter from NCRC, Affirm (NASDAQ: AFRM), Lending Club (NYSE: LC), Oportun (NASDAQ: OPRT), PayPal Holdings Inc (NASDAQ: PYPL), Square (NYSE: SQ) and Varo Bank, asked the CFPB to update its guidance on disparate impact to reinforce the Equal Credit Opportunity Act (ECOA) and Regulation B, which protects applicants from discrimination in any aspect of a credit transaction.
The companies are part of NCRC’s Innovation Council for Financial Inclusion.
The letter asked the CFPB to provide additional guidance on how it will protect consumers from unfair practices that could arise due to the use of artificial intelligence and predictive modeling in financial services.
Unlike traditional lending decisions based on standardized credit score reports, algorithmic lending makes use of alternative data and thus can score many of the millions of consumers who don’t have traditional credit scores. Some lenders already use sophisticated algorithms with hundreds or even thousands of variables to make consumer loans.
The letter asked the CFPB to:
- State that the disparate impact framework applies to models that use artificial intelligence (AI), machine learning (ML), algorithms and alternative data.
- Update its regulations to state that a business practice must meet a “substantial, legitimate, and non-discriminatory interest” that could not be achieved through another model that has a less discriminatory effect.
- Clarify when a disparity in loan decisions rises to the level of potentially constituting grounds for a claim of discrimination.
- Create clear guidelines for when and how lenders should seek to find alternative models or data.
- Explain the extent to which lenders can collect demographic data for their own fair lending compliance reviews.
The letter is notable because it came jointly from a group of financial tech companies that have pioneered digital financial services, and from NCRC, a national network of fair lending, fair housing and consumer rights advocates.
“The CFPB can protect consumers from digital discrimination by speaking directly to the public on how it will enforce fair lending practices in an increasingly digital-first marketplace,” said Jesse Van Tol, CEO of NCRC. “We cannot stand by and allow algorithms to resurrect old biases in new packages, or introduce new forms of discrimination hidden in proprietary code. Now that use of AI and ML systems is becoming more commonplace, it is critical that the bureau updates its regulations to hold lenders accountable to building underwriting systems that prioritize the rights of consumers, and particularly for historically disadvantaged and underserved groups. We cannot allow complexity to be either an opportunity or an excuse for digital discrimination.”
“Varo firmly supports the existing disparate impact regulations, which act as a basic and essential safeguard against racial bias in financial services,” said Colin Walsh, CEO of Varo Bank, NA. “We know that a history of racism in financial services contributed to much of the economic inequality we see today. As tech, data, and AI plays an ever larger role in delivering quality financial services, this regulation is critical to ensuring these tools don’t lead to unintended outcomes. Instead of weakening these rules, this is the moment to reaffirm our shared commitment to a financial system that is designed to promote inclusion and opportunity for all Americans.”
“Oportun is grateful for this opportunity to partner with NCRC and our Innovation Council peers to advance our shared goals of financial inclusion for U.S. consumers,” said Ezra Garrett, Senior Vice President, Oportun. “Responsible innovations in technology, data, and our digital platform have enabled Oportun to provide hard working people with responsible, affordable, and credit-building alternatives to payday and auto-title loans for over 15 years. We are pleased to be joining with like-minded advocacy groups and businesses who are similarly committed to ensuring financial technology is employed safely and securely and used to promote economic equity and opportunity.”
“Strong regulatory protections against discrimination in lending are critical for a just society, and for technology innovation to succeed,” said Armen Meyer, Head of Public Policy, LendingClub. “For years, we have stood up to argue that disparate impact anti-discrimination regulations are critical for both society and industry. With NCRC’s leadership, fintech has united in support of strengthening these regulations that address the risk of digital redlining. If federal regulators provide these clarifications to the Equal Credit Opportunity Act and other anti-discrimination laws, lenders can have confidence to invest in technology innovation that can lower prices and expand inclusion while preventing digital discrimination. Our hope is that other sectors of the economy will come to look at these lending regulations as a model for how to address algorithmic bias, even outside of financial services.”
“At Square, our work is guided by our purpose of economic empowerment, which includes limiting barriers to the financial system,” said Courtney Robinson, Head of Financial Inclusion and Public Policy Development at Square, Inc. “We’re glad to join our colleagues in advocacy and technology in this dialogue with regulators.”
“Affirm’s mission is to deliver honest financial products that improve lives, and we have a long history of supporting policies and initiatives to address Disparate Impact,” said Scott B. Astrada, Director of Government Relations, Public Policy & Social Impact at Affirm. “These policy positions align technology, financial inclusion, and consumer protection to responsibly expand access to credit, especially for low- and moderate-income communities.”
The National Community Reinvestment Coalition and its grassroots member organizations create opportunities for people to build wealth. We work with community leaders, policymakers and financial institutions to champion fairness in banking, housing and business. NCRC was formed in 1990 by national, regional and local organizations to increase the flow of private capital into traditionally underserved communities. NCRC has grown into an association of more than 600 community-based organizations in 42 states that promote access to basic banking services, affordable housing, entrepreneurship, job creation and vibrant communities for America’s working families. More: www.ncrc.org
Affirm’s mission is to deliver honest financial products that improve lives. By building a new kind of payment network — one based on trust, transparency and putting people first — we empower millions of consumers to spend and save responsibly, and give thousands of businesses the tools to fuel growth. Unlike credit cards and other pay-over-time options, we show consumers exactly what they will pay up front, never increase that amount, and never charge any late or hidden fees. Follow Affirm on social media: LinkedIn | Instagram | Facebook | Twitter | TikTok.
About Lending Club
LendingClub Corporation (NYSE: LC) is the parent company of LendingClub Bank, National Association, Member FDIC. It is the leading digital marketplace bank in the U.S. Members can gain access to a broad range of financial products and services through a technology-driven platform, designed to help them pay less when borrowing and earn more when saving. Since 2007, more than 3 million members have joined the Club to help reach their financial goals. For more information about LendingClub, visit https://www.lendingclub.com.
Oportun (Nasdaq: OPRT) is a financial services company that leverages its digital platform to provide responsible consumer credit to hardworking people. Using A.I.-driven models that are built on 15 years of proprietary customer insights and billions of unique data points, Oportun has extended more than 4 million loans and over $10 billion in affordable credit, providing its customers with alternatives to payday and auto title loans. In recognition of its responsibly designed products which help consumers build their credit history, Oportun has been certified as a Community Development Financial Institution (CDFI) since 2009.
About Square, Inc.
Square, Inc. (NYSE: SQ) builds tools to empower businesses and individuals to participate in the economy. Sellers use Square to reach buyers online and in person, manage their business, and access financing. Individuals use Cash App to spend, send, store, and invest money. And TIDAL is a global music and entertainment platform that expands Square’s purpose of economic empowerment to artists. Square, Inc. has offices in the United States, Canada, Japan, Australia, Ireland, Spain, Norway, and the UK.
About Varo Bank
Varo Bank is on a mission to make financial inclusion and opportunity a reality for all – by empowering people with the products and support they need to create healthy financial habits and be in control of their finances. Varo Bank offers customers premium bank accounts that have no minimum balance requirement or monthly account fee, high-interest savings accounts, and tech-first features to help people save and manage their money effortlessly. Varo Bank is the first consumer fintech to be granted a national bank charter by the Office of the Comptroller of the Currency and was named one of Fast Company’s Most Innovative Companies for 2021. For more information, visit www.varomoney.com, like Varo Bank on Facebook, and follow us on Instagram and Twitter @varobank. Member FDIC.