Discrimination in lending isn’t just dumb. It is bad business.
Fair lending has been the law of the land dating back to at least 1974, when Gerald Ford signed the law. The Equal Credit Opportunity Act (ECOA, also known as Regulation B) initially fell under the realm of the Federal Reserve Board. However, In 2010, the authority shifted to the Consumer Financial Protection Bureau (CFPB).
It is relatively rare to see true discrimination in the credit card industry, and the United States Attorney General annually reports on the law to Congress. In cards, mass market lending systems use computers and data. The CFPB keeps a watchful eye on discrimination. It is interesting to see that of the 1.1 million complaints filed between 11/8/2018 and 11/8/2021, more than half the complaints were related to credit reporting, credit repair services, and other personal credit reports. The CFPB has a special section on their site and uses this audit reference guide.
The CFPB’s mantra is straightforward.
A creditor shall not discriminate against an applicant on a prohibited basis regarding any aspect of a credit transaction.
A creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage, on a prohibited basis, a reasonable person from making or pursuing an application.
In the land of plastic, your FICO Score, ability to repay (ATR), and income are what drive the business. However, a recent report by the Philadelphia Federal Reserve Bank notes that some of the algorithms issuers use produce a difference in bankcard credit limits, in a 63-page missive titled “Decomposing Gender Differences in Bankcard Credit Limits.”
While the conclusion does not suggest any intentional pattern or practice to discriminate in credit lines, the report supposes three potential drivers:
“(1) differential treatment in the credit market by gender, (2) differences in socioeconomic characteristics, especially at the time of card origination, or (3) differences in preferences for credit and credit cards, or some combination of the three.”
The report suggests:
“While we cannot rule out differential treatment in the credit market based on gender, we view this mechanism as unlikely for several reasons. In particular, given that the underwriting of credit cards is now highly automated, we may expect limited scope for bias in the assignment of credit limits for bank cards. A combination of differences in (2) and (3) seems most logical, given the established literature on gender differences in both socioeconomic factors, such as the gender pay gap and in preferences for credit and risk.”
So, let’s bring this down to earth and summarize. First, it is not likely that lenders discriminate in underwriting, but social aspects might suppress credit extension.
What came to mind was the issue with Goldman Sachs’ Apple Card. The incident made worldwide news with sexist claims. Many a banker probably laughed as Steve Wozniak claimed that his wife was discriminated against, as CNN mentioned: “Wozniak said his credit limit was 10 times that of his wife, despite the fact that they share all assets and accounts.”
But, when the state of New York Financial Services Department investigated, the discrimination issue was cleared for both Apple and Goldman Sachs.
Probably the most significant issue here is: how do you bump up a woman’s credit line? It is forbidden to ask for sex, age, or marital status on a credit application. There is a missed lending opportunity out there, though. You could probably use common first names, but that seems funky. It might be fine if your name is Margaret or Susan, but it gets gray if you are Alex or Sydney.
Recent data commissioned by Chase indicates that women are the primary wage earner in 40% of U.S. households and that 37% of women outearn their partners.
The bottom line is that discrimination based on gender is probably more due to historical factors than strategic ones. But, there is an opportunity for lenders to address this in advance of society fixing the issue. In the land of credit cards, everyone has the right to at least be in a little debt.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group