Are Fintech Lenders Less Biased?

October 19, 2021 at 10:40 am Leave a comment

To its supporters, technology has the ability to further egalitize the lending process by using unconventional data to assess the credit worthiness of underserved communities and removing human bias from lending decisions. To its critics, overly complex lending algorithms could further complicate the efforts of regulators to identify and clamp down on bias lending criteria. This debate is likely to have an increasingly large impact on credit unions, banks, and Fintechs as policy makers integrate 21st century technology into 20th century regulations. Recently released research underscores just how volatile this debate is destined to become.

The PPP program is a treasure trove for researchers of potential bias in lending decisions. Since the loans were guaranteed by the federal government, it is easier to evaluate what other factors led to businesses getting loans. Recently, a group of researchers at New York University concluded that: Fintech lenders were responsible for 53.6% of PPP loans to black owned businesses. According to the researchers “black owned businesses exhibit by far the most striking disparity among lender types when it comes to choosing Fintechs”.

In contrast, community banks with $2B or less in assets performed the worst when compared to all other financial institutions including CDFIs, credit unions and the largest banks.  In fact, the researchers conclude that larger banks demonstrated the least lender bias, underscoring their belief that automation contributed to more minority loans. Not surprisingly, this research has already drawn a heated response from community bankers who argue among other things that the research is flawed because it is based on assumptions about the race of borrowers.

Still, yours truly has been watching a lot of baseball recently and it seems to me that every game demonstrates that computer generated strike zones do a better job of calling balls and strikes than do umpires. As much as we like to extol the human element in decision making, common sense tells me that more automation not less can lead to an even fairer system for making lending judgements.

Chart depicting the proportion of PPP loans given to Black-Owned businesses  originated by financial institutions and Fintechs

Entry filed under: General, technology. Tags: , , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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