The concept of “standard of care” is well known in certain professions, including the practice of medicine and law. It is generally understood as a benchmark for accepted practices based on how a reasonable professional would behave in a specific circumstance and given then-existing knowledge. This definition assumes that the standard of care evolves with a professional’s knowledge and capabilities.
This same concept can help guide how we in financial services think about compliance with core regulatory requirements, including with respect to fair lending. More specifically, what is the standard of care when it comes to avoiding disparate impact on protected classes and how does that standard evolve based on our knowledge and the tools we have at our disposal?
It should be universally agreed that the underwriting and extension of credit to all people, regardless of race, gender or ethnicity, through an equitable and nondiscriminatory process is the ultimate objective of a fair financial system. The challenge is to find ways to do better and to ensure that our regulations don’t unintentionally lock in the status quo or unnecessarily delay progress.
This is the same challenge we face in other fields. When it comes to medical science, for example, without testing, experimentation and measurement of outcomes it would be next to impossible to advance the state of the field and thereby evolve the standard of care. The unprecedentedly swift development and approval of several COVID-19 vaccines showed what can be done when regulatory systems are agile enough to facilitate critical innovations to benefit human lives.
Conversely, the cost of not permitting innovation is stark. Imagine a scenario where COVID-19 vaccine development was blocked due to unnecessary regulatory barriers.
Social costs would similarly be incurred if we do nothing to make lending more inclusive and more fair, especially if it can be done without introducing risk to the financial system. For example,
With this framing, it is worth considering how we can take steps to advance the standard of care in fair-lending compliance.
To start, we have to recognize that systems today in the consumer lending space are highly technical: They are software and machine driven and capable of processing and analyzing rich datasets. For this reason, it is critical for all involved stakeholders, including providers, innovators and regulators to have the requisite technological literacy to understand and assess new tools or approaches — both benefits and new risks.
Next, regulators should leverage modern regulatory tools, including sandboxes, labs, safe harbors and no-action relief, in order to permit robust testing of new models that can help advance the state of the field.
There’s a big need to collect and share more data industrywide about the impact of artificial intelligence and machine learning on financial inclusion. Regulators should embrace the appetite of innovators to test and demonstrate results by creating clear and formal paths to pursuing such ends.
Finally, regulators and industry must keep their eye on the prize — in this case a more fair and equitable financial system — in order to speed the pace of progress. Blind adherence to legacy approaches and processes should not be allowed to create a maze that unnecessarily prevents the field from advancing.
A sense of urgency is perhaps the best antidote. As we have learned over the past year with the development of life-saving vaccines in record time, we are capable of safely innovating and helping lives in short order.
With respect to advancing fairness in financial services, we should pull from the above learnings and pursue the same objective of helping lives. If tested and verified, advanced math-based machine learning tools when applied to consumer lending and fairness hold substantial promise in advancing the state of the field and with it the standard of care. It is time to improve what financial services providers view as reasonable.
