Bank wants to begin using cut-off credit scores for unsecured consumer lending (i.e. applicants must have > than X credit score to be approved). How much documentation will be needed by the Bank to quell the examiner's anxiousness, or can the Bank choose any non-discriminatory parameter they want with no questions asked?

Thanks!

What is the risk that the bank is willing to take, equated to a credit score? Also, the 3 bureaus have different credit score models. You can get one for "unsecured" credit and that would be different than a general credit score, or ones for auto, mortgage, etc.

In any event, get with the credit bureau and determine where your risk (collection, delinquency, charge-off) falls on the range and make your choice. Document fully. If management pulls a random score out of a hat, there will be a FL issue.

If management pulls a random score out of a hat, there will be a FL issue.

Why?

I look at it in the same way as setting minimum loan amounts, or other judgmental decisions involving lending. What is the reason and potentially will there be some disparate impact.

High minimum loan amounts can be considered having a disparate impact against prohibited basis individuals unless management documents the reasons/profitability reflecting it an economic or business issue (rather than a veiled way to get around minority lending).

There have been studies have found that some prohibited basis groups have lower credit scores than control group members. If the bank's cutoff were based on credit risk it could be considered as an informed business decision. If based on a random number, it might be considered disparate impact if the score chosen eliminated a greater proportion of prohibited basis borrowers.

I had worked on an attorney client project when I was at a major bank, when they were sued by ACORN for "having subprime offices in minority areas and having conventional lending units in non-minority areas" - Chicago. (This was when the FannieMae score cutoff was 620.) We overlayed tract demographics (census race/ethnicity information) with mean/median credit scores from 2 major bureaus to reflect the office placement decision was based on business model rather than a prohibited basis. In addition (and on recommendation from the attorney) we ran 5 quarters HMDA data to validate that there was not one-way steering between the 2 units. Based on the outcome, ACORN and the DOJ backed-off, as the reasons for the choices were backed-up by legitimate business reasons and not arbitrarily excluding or disadvantaging segments in a disparate way. (The lucky part was that the credit score was a product of Fannie guidelines and not the bank. That would have been harder to prove it was picked on a non-discriminatory basis.)

I do agree with SB. Score selection should be based upon the scorring data provided by the provider....type of product, risk appetite, acceptable loss levels. It should be periodically reviewed gainst results It should not be pulled out of thin air.

A credit score represents credit risk regardless of race, national origin and so on. I have yet to see any regulator or the DOJ take on a credit score cut-off level from a fair lending perspective.

I agree with your comment about the DOJ. However, disparate treatment is referenced in the examination guidelines and since prohibited basis individuals are a greater proportion of the lower scores, management should come up with what they perceive is an acceptable risk rather than an arbitrary number. Why would a bank pick 720 rather than a 680? I would want to prove that it was an acceptable risk and not having someone question if the higher number was chosen to disadvantage prohibited basis applicants. (Or convesely to target white applicants.)

In talking to an OCC compliance director (now with CFPB) he mentioned that directly or indirectly the OCC fair lending teams have to feel comfortable that loan criteria was based on business facts rather than race, ethnicity or gender.

I have seen bank regulators and the DOJ question score cut-offs based on disparate impact. The way to avoid such is to document the reason for your choice in terms of the bank's risk appetite, as SB described.

Thanks for the informed opinions. This FL stuff is enough to make the banker want to take his money and go home, invest in some bonds rather than in consumer loans, and let the consumer get his money from the guy who shows up in the corner of the WalMart parking lot around midnight. I don't think that guy worries much about FL, the regulators, or the DOJ.

Agreed. My response is based upon my time at a credit card bank as well as other experience with scored products. I was so sick of discussing credit scores by the time I left the credit card arena.