Thursday, May 19, 2016

Disparate Impact...

Always had a problem with risk-based lending at credit unions for several reasons:
Risk-based lending...Baaaah, baaaah...

  • Too impersonal -  little room for exceptions, nor  for mercy.
  • Credit score decisioning is based on a false statistical model - correct at the macro level, unfair and abusive at the micro/individual member level.
  • Pricing "for risk" substantially overcharges the vast majority of consumers in the higher risk brackets.
  • Risk-based pricing is a subsidy for the more affluent.
  • Charging the poor more - unjustly - increases the risk of default, defies logic and all sense of fairness.

(....but other than that I have few concerns about the practice.)

A Legal Opportunity... For Lawyers!!!
The shadowy threat out there, which has always been waiting to bite CU risk-based lenders on an indelicate part of their anatomy, is the concept of "disparate impact" - which simply says that if something you do as a lender unfairly discriminates against a segment/class of folks, then lawyers are going to make you cough up a whole lot of cash to make amends.

That time may be at hand!  First, notice that the CFPB has started to bandy that phrase - disparate impact - around a good bit on several consumer financial issues.  But, perhaps. of more immediate interest may be the following article from the CU Journal: "How To Drill Down Into Your Portfolios."  Particularly this quote from the author who works for - you don't say! - a credit bureau:

"The article promotes the "importance of trended data" in risk rating ... "this requires the ability to trend consumer credit data, identify specific member metrics, and track those changes over time.  The most successful lenders have incorporated these metrics into their day-to-day processes. They consider trending one of the most important and effective techniques used to vector behavior and segment appropriately."

So far so good, it's just another infomercial, but then: "By quantifying a direction and magnitude of change, lenders are finding that while two members might have the same credit score and credit card debt today, they fall within markedly different risk profiles."

Lenders are finding:  "Markedly different risk profiles,... same credit score?!!!"  ( That spells:  d-i-s-p-a-r-a-t-e  i-m-p-a-c-t...!)

Your Honor, I rest my case.... 

(Get out the checkbook...!)


Anonymous said...

So what was the criteria being used for all those mortgage loans being made prior to 2008? Did lenders look at credit scores? History of borrowing and repayment? Income? Was the group of borrowers flawed? Or did the lenders create the type of loans that anyone regardless of credit score or history could qualify to make? Adjustable rate mortgages. Certainly no risked base planning there. Interest only payments. Good one. Refinancing! Come on in. Your home is worth more than you paid for it even though your only contribution is the interest you paid to borrow. Pull out "your" increase in equity and go on a vacation or buy a new car. Lender greed was the only criteria in use.

Anonymous said...

Lender greed or consumer greed? I did not see a single lender hold a gun to the consumer. Seems the consumer ran the home like a damn slot machine. After all the coins were empty'd out of the home - they walked away. Jim, if we did not stick it to the low FICO scored member we would have to impose higher rate to our high FICO scored member. Maybe we should charge the high FICO score member more rate and charge the low FICO score member a lower rate because they are generally broke anyway. This is Bernie Sanders and I approve this message.