Data Abuse
Consumer groups, meanwhile, warn that lenders could abuse the data to overcharge some households. Those fears have been heightened by lenders’ use of algorithms to wade through reams of data to make instant credit decisions, particularly after users of Goldman Sachs Group Inc.’s credit card for Apple Inc. complained late last year that women were given smaller credit lines than their husbands. The New York State Department of Financial Services subsequently opened an investigation.
Disparities in credit scores and incomes across races have led to a “really awful system” in which minority borrowers often pay more than they should, Gu said. His firm regularly reports loan application data to the federal consumer bureau under an agreement that allows Upstart to use borrowers’ educational backgrounds in underwriting decisions without fear of a regulatory crackdown, as long as the company continues to meet fair-lending standards.
“If you want to make it better, you need more data, and you need different kinds of data to help different kinds of people,” Gu said.
Lending Disparities
Using educational data could help level the playing field, he said. Howard students, for example, are 46% more likely to get a loan under Upstart’s underwriting model than they would from a traditional lender, and they enjoy interest rates that are 18% lower, Gu said.
But disparities remain. White Americans are more likely to have college degrees than blacks and Hispanics, Census Bureau data show, while college dropouts are more likely to fall behind on their student loans than borrowers with degrees, according to U.S. Department of Education figures.
Wells Fargo, for instance, quotes loan interest rates for a hypothetical freshman studying engineering at the Borough of Manhattan Community College that are nearly double those offered to a similar student studying the same subject at the City College of New York nearby, a tool on the lender’s website shows. Both are part of the City University of New York system. Community-college students often complete their four-year degrees at other institutions.
In 2007, Andrew Cuomo, then New York’s attorney general, warned lenders against using borrowers’ educational backgrounds when making loan decisions. And in 2014, the Federal Deposit Insurance Corp. told Sallie Mae that it couldn’t price loans to students using their college’s loan-default rates without violating the Equal Credit Opportunity Act.
This article was provided by Bloomberg News.