What is fair when it comes to lending?
If a fintech offers high-rate loans to people with low or non-existent credit scores, is that fair? What if it charges triple-digit annual percentage rates? What if these people can't obtain credit anywhere else?
If a bank offers loans with decent interest rates to people with high credit scores, but ignores large swaths of the people who are disproportionately Black, Hispanic and others of color, is that fair?
Banks and fintechs navigate a moral and ethical gray area when they try to extend credit to people with low incomes and low credit scores, especially when they charge high interest rates to cover the higher risks. A newly formed group of bankers, online lenders and consumer advocates will attempt to settle questions about what is fair, as well as questions around the potential for bias in the use of AI in lending and the need to explain AI-based loan decisions.
The new organization, which is called MoreThanFair, hopes to enable more Americans to get normal loans, to develop best practices for the industry and to lessen the stigma of online lending. Members include Cross River Bank, the National Bankers Association, the National Consumer Law Center and Upstart.
"Fairness is really about, are we treating people differently based on race, gender, et cetera," said Dave Girouard, co-founder and CEO of Upstart. "So fairness to me is about equity in lending. There are enormous opportunities to improve credit outcomes for people across the board and in every demographic you can name. And we should at least, first, believe it's possible and then work hard on the tools and technologies and processes and oversight and everything else we need to bring it to the forefront."
There are still a lot of people who can't get credit because of their low or nonexistent FICO score, group members note.
"I hear ads on the radio in D.C. that say if you have over 700 credit score, you can be approved in 10 minutes," said Nat Hoopes, head of public policy and regulatory affairs at Upstart. "That just told four-fifths of Black borrowers not to even apply. We think that there are people who have low FICOs scores who are creditworthy."
The FICO score does have value and is a predictive variable, Hoopes said, but
The new group's work is about raising awareness of the fact that Americans have safe and reliable financial choices, according to Phil Goldfeder, senior vice president at Cross River, which provides banking as a service for dozens of fintechs including Affirm and Upstart.
"Together with our partners, Cross River makes responsible loans to consumers who otherwise would have fewer options," Goldfeder said. "Think about someone in an emergency situation who needs access to financing immediately, what are that person's options?" he said, citing credit cards, pawn shops and payday lenders.
"Fintech creates another option," he said. "While it's not a panacea of credit for everyone, it establishes an opportunity to create a financial system that works for every consumer. For example, there is a segment of the population that doesn't want credit cards." Credit card debt can be extremely expensive, especially for people who pay just the minimum each month, he pointed out.
If responsible online lending were to be eliminated, "the vast majority of people [who were using online lenders] would be left with a product that is inherently less transparent, not as safe, not as fair," Goldfeder said. "The goal is to provide options and create services from which consumers today are otherwise left out. This new effort is highlighting the pragmatic approach we are taking in servicing consumers in a regulated and safe environment."
There's also a need for fair-lending testing throughout the industry, some members say.
"Whether it's a human loan officer and the human brain making snap judgments, or if it's a 1989 FICO algorithm, or if it's Upstart, everybody should be doing really rigorous testing for fairness," Girouard said. "And we should have some conversations about what those tests should be, what's the cadence. In this day and age, when everything's digital, you should be testing every loan and every applicant."
Consumer advocates also see the new group as a way to make sure Americans have better credit options.
"We all agree that the traditional credit scoring system can be improved upon," said Chi Chi Wu, staff attorney at the National Consumer Law Center. "We need to create a system that is more fair, more equitable, that has fewer racial disparities and is more predictive than the current credit reporting and scoring system, and that treats consumers better, that gives consumers more control over their own data and more agency."
In a fairer system, all data gathering would be opt-in and voluntary, she said. Consumers would have control over their data. Credit scoring algorithms would be developed that reduce racial disparities.
"I'm a lawyer and I can't do any of that by myself," Wu said. "Ultimately it's going to take the industry to build the better mousetrap. My role is to nudge and cheerlead and try to get the industry to go in the right direction."
Drawing lines between good and bad actors
To be sure, some fintechs have exploited consumers. Some make
Some say the line between a fair loan and an exploitative one is the 36% cap on lending interest rates set by the Military Lending Act and observed by many states. Others say transparency, disclosure and having a prudential regulator are hallmarks of a fair lender.
"Good is in the eye of the beholder," Girouard said. "If you need $400 to fix your car, so you can keep working, I'm not here to say 25% is an unacceptable interest rate, if it gets the job done and that's the best you can get. If you're going to Las Vegas to gamble with the money, 5% is a bad interest rate."
Upstart uses the 36% military cap on annual percentage rate.
The devil is in the details, Wu said.
"There are some actors that are worse and some actors that are better and even the good actors can make mistakes on occasion," she said. "The important thing is to keep them accountable."
She does write certain lines in the sand, however: triple-digit APRs, single-payment balloon loans and credit made without consideration of ability to repay are all bad, in Wu's view.
In the buy now, pay later space, for instance, the NCLC would like to see providers do a better job of calculating ability to repay.
"We want them treated more like credit cards because then there are more protections," Wu said. "But that's not to say we should just get rid of BNPL. That's why it's important to have these forums."
Good intent is not enough to make a company a good actor, Wu said.
"There are plenty of companies that have done bad things with good intentions," she said.
Some simply charge too much.
"Every generation of these innovators think they've got something new and it turns out they're doing what high-cost lenders from previous generations did," Wu said. "They often think they're providing something good for consumers. Some payday lenders are like, if we don't provide the credit, they can't get the car fixed and then they can't get the work and they're going to lose their job. I don't know how many times I've heard that argument. But do you have to be charging as much as you are?"
Wu supports recent calls by some consumer groups to provide more supervision of fintech lenders.
Lessening the stigma
Another objective for the group is to improve online lenders' standing.
"The idea that you are innovating does not inherently mean [what you're doing] is unfair," Goldfeder said. "That's the stigma that fintech is currently facing: that all fintech is new and it's all bad. Changing the tone of that conversation is very important and the reason why Cross River is engaged. MoreThanFair is about expressing what we are accomplishing today, to fill the gap and provide that access to credit. We're trying to fight rhetoric with fact."
The group will fight misconceptions that the underwriting and online lending industry is inherently unregulated or unfair or lacks consumer protections, he said.
"Innovation and financial services, regulatory compliance and consumer protection are not mutually exclusive ideas," Goldfeder said. "Fintech companies are serving millions of consumers every single week in a fair, safe way and that must continue."
