Although lenders maintain that credit scoring removes bias from the lending process, Home Mortgage Disclosure Act data reveals that denial rates for minorities remain much higher than for non-minority borrowers. A contributing factor could be that low- and moderate-income borrowers often only have access to credit that has a higher risk rating in credit scoring models, such as finance company loans. Credit scoring does remove personal judgment from the loan process, but it substitutes statistical judgments that are made based on the behavior of prior customers. If those prior customers are not demographically representative of the current base of loan applicants, a credit scoring model might underestimate the likelihood of repayment by consumers whose demographics are not fully represented in the sample of prior customers upon which the scoring model was based.
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Although lenders maintain that credit scoring removes bias from the lending process, Home Mortgage Disclosure Act data reveals that denial rates for minorities remain much higher than for non-minority borrowers. A contributing factor could be that low- and moderate-income borrowers often only have access to credit that has a higher risk rating in credit scoring models, such as finance company loans. Credit scoring does remove personal judgment from the loan process, but it substitutes statistical judgments that are made based on the behavior of prior customers. If those prior customers are not demographically representative of the current base of loan applicants, a credit scoring model might underestimate the likelihood of repayment by consumers whose demographics are not fully represented in the sample of prior customers upon which the scoring model was based.