Glossary term
Fair Lending
Subject: Compliance and Regulation, Conduct and Consumer Protection
Also known as: Equal Credit Opportunity
Fair lending is the principle, backed by law in many countries, that credit must be offered and priced on the borrower's creditworthiness and not on protected traits such as race, sex, religion or age.
Explanation
Lenders may judge risk, but they may not discriminate. Two kinds of unfairness are recognised: disparate treatment, where similar applicants are treated differently because of a protected trait, and disparate impact, where a neutral-looking rule falls much harder on one group without good business reason. Redlining, refusing to lend in certain neighbourhoods, is a classic example. The US Equal Credit Opportunity Act and Fair Housing Act are well-known sources, and other countries have equality or non-discrimination laws that reach credit. Banks test scorecards, pricing and marketing for bias, review exceptions and complaints, and document why decisions were made. Automated models need the same testing, because bias can be learned from past data. A lender whose approval rates differ sharply between groups is usually asked to justify the gap with a business reason.
Example
A microfinance lender's data team compares approval rates for similar-scoring small-business applicants by neighbourhood. Applicants from two districts are approved far less often, though their repayment records match others. The review finds that a branch rule asks for extra guarantees in those districts. The lender removes the rule, reviews rejected files from the past two years and offers reconsideration to those turned down.
Not to be confused with
- Responsible Lending
- Responsible lending asks whether the borrower can afford the loan; fair lending asks whether the lender treated applicants without bias.