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Elizabeth Warren may be running for president, but she hasn't stopped doing her whole Being A Senator thing, either. Which is why Warren is asking the heads of various agencies that regulate banks and financial services to explain what they intend to do about a problem with financial technology programs that have largely automated a lot of loan decisions. You see, a study published in October found that while systems like Quicken Loans have the potential to eliminate discrimination in lending, by removing the potential for loan officers' biases to affect lending decisions, in actual practice those algorithms still result in higher interest rates for black and Latinx borrowers, even when their credit scores are exactly the same as white customers.

Yes, we have made the robots racist.


The study, "Consumer-Lending Discrimination in the FinTech Era" (today we learned the buzzword "FinTech" for "financial technology"), was published by scholars at UC Berkeley's law school and its Haas School of Business, and aimed at determining whether FinTech lending fulfilled one of its promises: Could removing human loan officers eliminate bias from lending decisions? The authors found some surprising mixed results: While computerized loan decisions actually did eliminate bias in whether loans were approved, the loans that were approved resulted in higher costs for minority borrowers, even when the data were controlled for borrowers' credit scores.

"It's a surprise finding — because there's no human," said Robert Bartlett, a law professor at the University of California, Berkeley and a co-author of the study.

The researchers found that minorities paid 5.3 basis points extra in interest with online mortgage applications, little different than the 5.6 additional points they shell out with the overall set of lenders.

In other words: on a $300,000 mortgage, an African-American or Latino applicant would need to pay just under 1 percent — or around $2,000 more upfront in "discount points" or prepaid interest -- to secure the same mortgage rate as a white applicant, Bartlett said.

Each year, Latino and African-American borrowers pay between $250 million and $500 million extra in mortgage interest, the study said.

As to why that's happening, that appears to be the result of other factors used in creating the algorithms for "strategic pricing" of loans. Exactly what those factors are, Bartlett said, can be hard to identify since the programs are a proprietary "black box" used by the companies.

One potential explanation, however, is that online lenders utilize variables other than the traditional financial ones like credit score; they might be factoring in a borrower's geography or education level to price their loans, Bartlett said. [...]

[The] increasing use of "big data," in algorithmic lending, Bartlett said, could deepen discrimination further.

For example, the high school someone attended might predict their default rate. But it could predict their ethnicity, too.

Which is why Warren, who serves on the Senate Committee on Banking, Housing, and Urban Affairs, wants federal bank regulators at the Federal Reserve, FDIC, Treasury Department, and her baby, the Consumer Financial Protection Bureau, to answer her some questions, please:

  • What is each agency "doing to identify and combat lending discrimination by lenders who use algorithms for underwriting"?
  • How is each agency responsible for enforcing fair lending laws, and how does that regulatory authority extend to regulating FinTech?
  • Has the agency done any "analyses of the impact of FinTech companies or use of FinTech algorithms on minority borrowers, including differences in credit availability and pricing"? Please show your work. If the agency hasn't done such analysis, what the heck are they waiting for?
  • Has the agency identified cases of discrimination, and hey, while you're at it, what can Congress do to help you nice regulators "enforce fair lending laws or protect minority borrowers from discrimination in their interactions with the FinTech industry"?
  • Isn't "algorithm" a funny word, since Al Gore has no sense of rhythm?
Warren has asked the agencies to get back to her by June 24, after which she'll no doubt incorporate the agencies' responses ("Nunya business, lady!" "We love big banks and we cannot lie!") into a new position paper.

[Elizabeth Warren / Warren letter to agencies / Consumer-Lending Discrimination in the FinTech Era / CNBC / Daily Californian]

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Doktor Zoom

Doktor Zoom's real name is Marty Kelley, and he lives in the wilds of Boise, Idaho. He is not a medical doctor, but does have a real PhD in Rhetoric. You should definitely donate some money to this little mommyblog where he has finally found acceptance and cat pictures. He is on maternity leave until 2033. Here is his Twitter, also. His quest to avoid prolixity is not going so great.

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