Are you evaluating your models for fair lending compliance?

No matter how hard developers try to identify and avoid discriminatory variables in models, these variables can still lead to unintentional discrimination.

Even seemingly innocuous lifestyle questions, such as which brand of deodorant or shampoo someone prefers, can potentially signal a person’s gender, which is a prohibited basis for making lending decisions. As a result, these models – often used by marketing departments – can lead to unintentional discriminatory segmentation if they aren’t closely monitored.

A model review team needs to understand how models are developed, how model variables work, and whether the weighting of each variable could have an unintentional fair lending impact. Otherwise, models might unintentionally affect protected groups in unfair ways, including:

• Excluding or pricing higher majority-minority census tracts
• Creating disparate impacts in low- and moderate-income areas
• Weighting female applicants less favorably than male applicants

Misunderstandings about the models in use can result in penalties, consumer reimbursements, and an increased risk of legal and reputational harm.

Regulators have not released specific guidance on which models require fair lending review. Organizations should establish definitions and guidance on what constitutes a need for review and when to bring model risk management and compliance teams together.

Models to consider include those that influence:

• Third-party fintech models
• Marketing and targeting applications
• Credit applications
• Underwriting and pricing
• Any customer-facing offering that uses a model
• Potentially, fair lending analysis and redlining models

Organizations should also review any models that might come from mergers, acquisitions, partnerships, and third-party vendors.

In addition, models developed and offered by fintechs continue to expand. These models should receive a close evaluation before use because fintechs are subject to different regulatory oversight of fair lending and model risk laws and regulations. The responsibility for reasonable risk management ultimately rests on the financial services organization.