Fed Examines Credit Scores, Finds No Bias

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In a report to Congress that is certain to generate controversy, the Federal Reserve Board says that credit scores vary "substantially" among racial and ethnic groups but that their use has made credit more available for major purchases such as buying homes.

The Fed's study, encompassing credit bureau records and demographic data from a national statistical sample of 301,536 people, was mandated by Congress in 2003. Credit scores are heavily used not only in home mortgage underwriting and pricing, but also for credit card, auto loan, employment, insurance and rental application screening.

Critics have questioned the accuracy and fairness of credit-score models, charging that in some cases they are inherently biased against minority groups such as blacks and Hispanics.

After a research effort over several years that focused on three credit-scoring models -- including one created by Federal Reserve staff economists -- the central bank concluded that:

? Credit-score statistical models are not biased against any demographic group and are highly predictive of future payment performance. Lower scores correlate strongly with future delinquencies; higher scores are associated with good payment performance.

? Blacks and Hispanics, on average, "have lower credit scores than non-Hispanic whites and Asians."

? Younger individuals of all demographic groups have lower credit scores on average than older people, in part because credit-scoring models focus on payment histories and length of credit accounts. Younger consumers generally have fewer accounts and shorter payment histories.

? The payment performances of some demographic groups differ from what their numerical scores might suggest. For example, according to the Fed, "blacks, single individuals, individuals residing in lower-income or predominantly minority census tracts show consistently higher incidences of bad performance than would be predicted" by their credit scores. On the other hand, "Asians, married individuals, foreign-born (particularly, recent immigrants), and those residing in higher-income census tracts consistently perform better than predicted" by their credit scores.