Senators alarmed by study linking loan rates to college choice

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Sens. Sherrod Brown of Ohio and Elizabeth Warren of Massachusetts, along with three other Democratic senators, have asked Upstart Network and other lenders that use education data in credit decisions to ensure that their underwriting practices comply with fair-lending laws.

In a letter Thursday to Upstart CEO Dave Girouard, the senators cited a report released this month by the Student Borrower Protection Center that found Upstart charged higher interest rates on personal loans to graduates of historically black or predominantly Hispanic colleges.

Specifically, the report claimed that a graduate of Howard University, a historically black university in Washington, D.C., would be charged $3,499 more over the life of a five-year loan than a similarly situated graduate of New York University.

“These findings raise serious concerns that Upstart’s use of educational data may have a disparate impact on borrowers of color,” the lawmakers stated in the letter. “While we encourage lenders to innovate to improve access to credit — particularly for marginalized borrowers who have been shut out of the credit system — all lenders must ensure that their underwriting practices comply with fair lending laws.”

The Democratic senators raised concern about lenders potentially using data on where borrowers attend college in their underwriting models.
The Democratic senators raised concern about lenders potentially using data on where borrowers attend college in their underwriting models.

It is unclear whether banks could also be on the receiving end of questions by lawmakers.

Upstart works with banks like Cross River, Customers Bank and First National Bank of Omahu, which use its platform to make unsecured personal loans. Upstart uses more than 1,600 data points in its AI-based model to set pricing and assess credit risk of consumers.

In 2017, the online lender became the first company to obtain a so-called no-action letter from the Consumer Financial Protection Bureau, effectively stating that Upstart Network could develop its underwriting model without fear of enforcement or supervisory action from the regulatory agency.

The Democratic senators — the other three were Kamala Harris of California and Robert Menendez and Cory Booker, both of New Jersey — also sent identical letters to four other student and personal loan providers and two service providers, none of which were cited in the report. They are Climb Credit, College Ave Student Loans, Social Finance Inc., Earnest Inc., MeasureOne and National Student Clearinghouse.

The potential for students to be charged discriminatory loan pricing based on their educational data has been a concern raised for years by regulators. The letter noted that in 2012 the CFPB cited private student lenders' use of a so-called cohort default rate, used to measure defaults on loans based on the college or school attended by a borrower.

The lawmakers asked for a response by Feb. 28 to roughly 25 questions about how each company tests for and demonstrates compliance with fair-lending laws.

For example, the letter asked Upstart to describe in detail the use of educational characteristics in its model and to explain how they factor into credit decisions.

Upstart co-founder Paul Gu said on a blog last week that he was surprised by the report given that Upstart a no-action letter from the CFPB to test its products, and he objected to how the study was conducted. He noted that the SBPC study was based on one person requesting a loan rate 26 different times.

“SBPC’s claim that the loan applications were identical except for the applicant’s college attended is inaccurate and misleading," he wrote. "The applications had many differences among them, including changes to the applicant’s credit report. These differences affected the interest rate offered.”

"We conduct rigorous and quarterly fair-lending testing across millions of actual applicants," Gu continued. "These large-scale tests consistently show that the addition of alternative data such as education, occupation, or employment reduces the bias in lending rather than increasing it."

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Student loans Redlining Artificial intelligence Racial Bias CFPB Elizabeth Warren Sherrod Brown
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