Upstart says it is working to improve AI models after the report found discrepancies in race approval

Online consumer lender Upstart Holdings says it is improving its artificial intelligence models after a law firm that monitors its compliance with fair lending found lower loan approval rates for black applicants.

The law firm, Relman Colfax, said in a recent report They found large discrepancies early this year in the number of times they approved sluggish loans to white and non-white borrowers. The law firm wrote that the discrepancies in and of themselves did not “demonstrate a just infringement of lending” and were not unusual, but recommended a “less discriminatory” model for a grumpy to adopt.

The report points to shortcomings in the San Mateo, California-based fintech firm’s loan decision model, which Upstart said is more comprehensive than the underwriting methods banks have long used. cocky used A set of so-called surrogate data To measure a borrower’s creditworthiness, including a person’s education and employment history, often working with banks to make loans.

In 2017, Upstart entered into an agreement with the Consumer Financial Protection Bureau that allowed it to pursue innovation with less concern about the Fair Lending campaign, but the arrangement expired in June.

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In a written statement, the company He said her model agrees 43% of black borrowers have interest rates lower than traditional credit scoring models. He also noted that the review found that there is no “pricing bias on our platform,” so borrowers pay the same interest rates regardless of their background.

But Upstart also said disparities in loan approval for black applicants are an “industry-wide challenge driven by decades of racial inequality, including credit scores.”

said Nat Hobbs, Chief Upstart, Upstart Government and Regulatory Affairs. “We look forward to similarly transparent and rigorous testing being applied to all lenders – old and new – so that all Americans can access universal and affordable credit.”

The report stems from an agreement reached as a junior with the NAACP’s Legal Defense and Education Fund and the Center for Student Borrower Protection in December 2020, when Upstart agreed to create Relman Colfax as a regulator of fair lending practices. The agreement came on the heels of a 2020 SBPC study that found higher borrowing costs for a sample of graduates of Howard University, a historically black institution, compared to a New York University graduate.

In a statement Friday, SBPC CEO Mike Pierce said that “new evidence that Upstart’s model appears to discriminate against its black clients is completely unacceptable and requires immediate action.”

“Assuming they adhere to it, Bragg’s commitment to addressing evidence of discrimination in her model is commendable. Others in the industry with similar disparities should consider this process,” Pierce added on Monday.

“No unfair discrimination was found in our model,” said Hobbs, CEO of Upstart. “I’m not aware of any company more committed to the rigorous fair lending test and to building comprehensive credit products than Upstart.”

Borrower advocates Praise the agreement As a new way to systematically track whether AI models contain racial biases that make getting credit more expensive for black customers. The Relman Colfax report was third on Upstart. An earlier report noted similar disparities but has not yet recommended an alternative approach.

Howard University law professor Matthew Bruckner credited Upstart for opening itself up to scrutiny, and said it’s probably “far from” the only company with such disparities.

Bloomberg News, for example, found that Major Mortgage Lenders Approved 87% of refinancing applications were from white applicants in 2020 and only 71% from black applicants. The disparities were particularly pronounced at Wells Fargo, which approved 72% of refinancing applications from white applicants and only 47% from black applicants. Wells Fargo, which has is called analysis ‘Too simplistic’ She has since been sued for those results.

Howard University’s Bruckner called for “strong public oversight” of equitable lending in banks and non-banks alike. Such a commitment would include making significant investments in data scientists who can conduct analyzes for regulators such as the Consumer Financial Protection Bureau and state attorneys general, Bruckner said.

Bruckner also argued that the law firm’s findings show a potential flaw in so-called no-action letters from regulators such as the CFPB. In 2017, the Consumer Bureau reached a no-action arrangement with Upstart that allows the company to pursue innovation with less concern about tough regulatory action.

This arrangement ended in June, when cocky request Ending the no-action message “to keep our risk models accurate and up-to-date during the period of significant economic change.”

The discrepancies the law firm found occurred during the first quarter of 2022 and “on a set of data” from the third quarter of 2021, while Upstart remained subject to a no-action letter.

in 2019 Blog post About the no-action letter, CFPB officials wrote that they were testing whether the company’s models led to “greater disparities than the traditional model regarding race, ethnicity, gender, or age.”

The agency wrote that its tests showed “no differentials that require further fair analysis of lending under the compliance scheme.”

cocky is part of new organization Called MoreThanFair focuses on using technology to make lending more inclusive, while ensuring that AI models are “properly moderated and rigorously tested,” according to its website. The group, which was launched this month, includes other AI-powered lenders such as Oportun Financial and LendingClub, as well as community groups such as the National Alliance for Community Reinvestment, the National Center for Consumer Law and Latin civil rights group UnidosUS.

“Overcoming decades of deadlock in access to credit is a major challenge, so we are fortunate to be joined in this effort by a diverse group of leading organizations,” Chief Innovative and Co-Founder Dave Girouard said in a press release announcing that. release.

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