But Democratic Sens. Sherrod Brown (Ohio), Kamala Harris (Calif.) and Elizabeth Warren (Mass.) say these practices may have a disparate impact on minority groups and violate fair-lending laws. Now, they are calling on the Consumer Financial Protection Bureau (CFPB) to take action.
“While the CFPB should encourage financial institutions to increase access to financial services … the use of non-individualized data raises fair lending concerns,” lawmakers wrote in a letter to CFPB Director Kathleen Kraninger released Thursday. “The lender is not evaluating the applicant based on their own characteristics, but instead based on the characteristics of other students at their school or who were in the same major or program.”
In response to reports of alleged discrimination in private student lending, Senate Democrats in February requested information from six companies on their use of educational data in underwriting. The practices of two of those firms, Upstart and Climb Credit, raised red flags.
Upstart, an online lending platform, considers where an applicant attended college as one of many variables in its credit scoring model. The company ranks colleges based on average standardized test scores of incoming students, which lawmakers could result in discrimination because racial and ethnic minorities are disproportionately concentrated in schools with lower test scores.
To that end, Democrats are citing a recent study by the Student Borrower Protection Center that analyzed the educational data from Upstart. Researchers searched Upstart for rates for applicants with identical credit profiles across a range of higher-education sectors, including Hispanic-serving institutions and historically black colleges and universities.
In one case, a hypothetical 24-year-old analyst seeking to refinance a $30,000 loan would pay nearly $3,500 more over five years if she graduated from Howard University compared with a similar student at New York University, according to the report. The Howard grad would also be hit with $729 in loan origination fees that the NYU alum would avoid.
Graduates of New Mexico State University, a school where more than 50 percent of students are Hispanic, were charged nearly $1,724 more than otherwise identical NYU graduates in the same scenario. That includes $631 more in origination fees.
When the Student Borrower Protection Center released its report in February, Upstart chief executive and co-founder Dave Girouard called the findings “misguided.” In response to the inquiry from lawmakers, the company argued that its model actually shows increased rates of approval for minority borrowers.
“Upstart has worked proactively with regulators since inception to ensure that our lending platform operates safely within the bounds of fair lending regulations,” the company said in an email Thursday. “For more than two and a half years, we’ve tested our model for bias each quarter and shared the results transparently with the CFPB. Each quarterly test has demonstrated that Upstart’s model doesn’t introduce unlawful bias.”
Senate Democrats also took issue with the methods of Climb Credit, a student-lending company based in New York City. The lender considers an applicant’s major or academic program to predict earnings after graduation, which is then used to calculate a future debt-to-income ratio. The company said a borrower’s interest rate is based solely on FICO.
Lawmakers say studies have shown that the use of academic programs can result in discrimination against women and minority borrowers. A 2017 study by the American Enterprise Institute examining the use of college majors as a determining factor for credit found that the practice runs a high risk of violating fair lending laws. Black and Hispanic graduates tend to select majors that yield lower pay than their White peers.
Climb Credit told lawmakers that the company does not conduct any testing to determine whether its underwriting practices have a disparate impact.
“We don’t currently assess disparate impact with race data, because we don’t collect race data,” Casey Powers, chief operating officer at Climb Credit, explained in an email. “That is a choice made by design to avoid any possibility of redlining. We do continuously monitor and make updates to our regulatory compliance around disparate impact.”
Nevertheless, lawmakers find that decision troubling and say the CFPB needs to conduct additional oversight.
Democrats have railed against the consumer bureau, which declined to comment, for undermining the supervisory and enforcement duties of its Office of Fair Lending.
"The findings of our review highlight how important it is that the CFPB have a dedicated office with the necessary resources and expertise to rooting out redlining and other forms of illegal discrimination,” lawmakers wrote in Thursday’s letter.