The National Community Reinvestment Coalition (NCRC) and a majority of its Innovation Council for Financial Inclusion (IC) called on the Consumer Financial Protection Bureau (CFPB) to clarify how lenders can request and use customer demographic data including race.
Such clarity would help lenders to self-test for fair lending by soliciting such data. Federal fair lending laws allow such solicitation. In the statement, the IC makes the case that if the CFPB issued an interpretive rule clarifying how lenders can collect this data, they would be better able to self-test and reduce the risk of disparate impact in their use of Artificial Intelligence.
The statement issued last week by NCRC, Lending Club, Zest.AI, PayPal, Oportun, and Upstart expands on a prior IC statement from July 2021 (“Statement on Request for Guidance on Implementation of Disparate Impact Under ECOA”).
Understanding the demographic characteristics of loan applicants is an essential part of conducting fair lending testing. Currently, lenders must ask for demographic information when taking mortgage applications and will soon have similar responsibilities for small business lending.
However, the same rules do not apply to consumer credit. Instead, lenders use statistical techniques to make inferences about the demographic characteristics of borrowers based on their last name and census tract.
This modeled approach has significant shortcomings. Conclusions can only be drawn for a group and not for specific individuals, rare surnames are thrown out, and secular shifts in marriage and gentrification are reducing the accuracy of predictions. Lenders can voluntarily collect demographic data, but because the rules for doing so lack clarity, they rarely do because of regulatory and compliance concerns.
The “Statement on the Need for An Interpretive Rule Concerning the Solicitation of Demographic Data for the Purposes of Fair Lending Self-Testing” calls for the CFPB to issue an interpretive rule clarifying how lenders could solicit demographic information directly from applicants to enhance their fair lending testing procedures.
Adam Rust is Senior Policy Advisor at NCRC.