The path to a fairer credit economy
While income and racial inequality have been baked into our society for centuries, the pandemic and killing of George Floyd have unleashed nationwide outrage and an urgent call to action to address the structures that perpetuate these disparities. In response, financial institutions are embracing new approaches and business models to correct longstanding fairness and inclusion issues, including increasing credit and loan access to people of color.
The status quo isn’t working
Pre-COVID, the numbers couldn’t hide the truth that change was needed.
A recent Northwestern University study found that racial disparities in the mortgage market haven’t declined much in the last four decades when it comes to discrimination in loan denial and interest rates. The study indicates that Black and Latino mortgage applicants are more likely to be declined than white applicants, and more likely to be offered high-cost loans if they’re approved at all.
According to a paper published by the Consumer Financial Protection Bureau (CFPB), a large swath of Black Americans are “credit invisible” and “unscorable” due to a lack of data. The CFPB report estimated that 15 percent of Black consumers are invisible and roughly an additional 13 percent have insufficient or stale reports that are unscorable. The unfortunate result is that 28 percent of Black applicants who apply for a credit card or loan are likely to be rejected outright because of their credit invisibility. Overall, the U.S economy has lost $16 trillion dollars due to racism.
And now with the pandemic exacerbating structural and economic inequality, worst fears will be realized unless financial institutions implement changes to improve credit and loan access.
How can financial institutions break the cycle?
While the mandate for change is clear, the central question becomes how can lenders reach new customers with little credit history or those that are unscorable using traditional methods?
The answer and future of lending lie in artificial intelligence and machine learning. As a catalyst for change, this advanced technology enables financial consumer services to create fairer models that do not sacrifice profits and growth.
AI technology can safely widen credit access for low-income borrowers who have been left out of mainstream lending. The use of AI gives financial institutions a new set of fair lending tools and practices that deliver fairer models and more accurate denial reasons to consumers on their credit-building journey.
The path to financial inclusion begins with re-evaluating the status quo and understanding these new technologies and methods. Our latest white paper outlines a new approach to help banks move beyond the status quo to lend more inclusively without taking on added risk. Now is the time to act. The health of our society and economy depend on what we all do next.
Download: The path to a fairer credit economy
