New Uses for Credit Scoring

New Opportunities for Fair Lending
Credit scoring is rapidly being used for much more than making credit decisions on high volume credit programs such as credit cards and consumer installment loans. New uses for credit scoring, some of which are still in the idea stage, are rapidly entering the credit business. Inevitably, new uses for credit scoring will generate new ways of evaluating the compliance of credit scoring with fair lending laws.

Consider several of the uses. Credit scoring is being used for evaluating applications from small businesses. Some lenders are taking this farther and using credit scoring to support their marketing efforts in attracting small business loan customers. Clearly, in an area of credit where special handling and unique considerations have been the watchword, credit scoring may dramatically change how banks make loans to small businesses.

These changes in underwriting and marketing practices bring in fair lending issues. For example, users will need to consider the impact of the scoring system on minority or women business owners. Scoring may eliminate practices such as providing extra help to some customers but not to others. On the other hand, scoring systems may have a disparate impact on certain groups of customers. For example, if the system gives points to experience, the system may disproportionately deny applications from those who are starting their first business and have no record of performance.

Perhaps of more immediate concern to compliance is the idea to use credit scoring to risk grade and package loans for sale to private investors. While each bank should be evaluated based on its overall lending performance, the existence of such a program could begin to motivate profit-driven loan departments to emphasize these easy sales. Over time, CRA and fair lending may fall as priorities. The critical question underlying this phenomenon is the extent to which profit is or is not a part of a business purpose defense to a charge of disparate treatment.

Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 9, 6/96