Consumer Law

Does Credit Scoring Produce a Disparate Impact?

By Jeff Sovern

That's the title of a paper by Robert B. Avery, Kenneth P. Brevoort , and Glenn B. Canner, all of the Fed. They answer the question in the negative as to race.  Here's the abstract:

The widespread use of credit scoring in the underwriting and pricing of mortgage and consumer credit has raised concerns that the use of these scores may unfairly disadvantage minority populations. A specific concern has been that the independent variables that comprise these models may have a disparate impact on these demographic groups. By "disparate impact" we mean that a variable's predictive power might arise not from its ability to predict future performance within any demographic group, but rather from acting as a surrogate for group membership. Using a unique source of data that combines a nationally representative sample of credit bureau records with demographic information from the Social Security Administration and a demographic information company, we examine the extent to which credit history scores may have such a disparate impact. Our examination yields no evidence of disparate impact by race (or ethnicity) or gender. However, we do find evidence of limited disparate impact by age, in which the use of variables related to an individual's credit history appear to lower the credit scores of older individuals and increase them for the young.

But does everyone in the government agree?  The EEOC recently sued Kaplan, the test prep service, for using credit reports in hiring, which, the EEOC claims, produces a disparate impact on African-Americans.  True, credit scores and credit histories are different, but the scores are based at least in part on the histories.

Full post as published by CL&P Blog on January 05, 2011 (boomark / email).