Educational Redlining?
The use of education data in underwriting could leave HBCU and MSI graduates in the dark
By Aryn Bussey | July 24, 2019
Access to credit can open doors to economic opportunity and determine consumers’ ability to own a home, start a small business, or even purchase a vehicle. Millions of people, however, are shut out of today’s credit system and the opportunities that come with it—particularly borrowers of color. According to the Federal Reserve, Black and Hispanic consumers within every income bracket are more likely than their white peers to be denied credit or offered less credit than requested. For years, policymakers have weighed the use of alternative data like cell phone or utility payment history to help expand marginalized communities’ access to credit.
Tomorrow, the House Financial Services Committee’s Fintech Task Force is holding a hearing on the use of alternative data to expand access to credit. It is critical that the Committee examine what I believe is a dangerous and discriminatory trend—the use of education data for determining creditworthiness under the guise of “innovation.”
Recently, financial services companies have begun to explore using education data for determining creditworthiness. Education data like the type of institution attended, a student’s area of study, a school’s average SAT score, or even whether an applicant’s parents completed college have been proposed, and even used, to determine credit eligibility and pricing. The use of this data is touted by industry as a way to expand access to credit for underserved communities. However, policymakers should consider how the use of education data in determining credit will further disadvantage the communities it is purported to help.
As a proud third-generation HBCU graduate, former legislative and executive branch education policy staffer, and a Black female consumer this approach deeply troubles me. America has a longstanding history of discrimination and inequality in education, ranging from access and affordability to predatory players and repayment. And now, lenders are seeking to introduce another potentially discriminatory practice.
Use of education data promotes social stratification
The use of education data in credit decisions is troublesome given the history of disparate access to education in America. From standardized testing, to degree attainment, to exclusionary enrollment at “elite schools,” countless Americans have been deemed unworthy of an equitable education simply because of the color of their skin or the socioeconomic status of their families.
For example, although degree attainment is on the rise for many racial and ethnic groups, research shows there is a shortage of minority students, particularly African-American and Latino students, at selective institutions of higher education. Only nine percent of Black students, eight percent of Indigenous American students, and twelve percent of Latino students attend America’s most elite public universities. When credit terms are tied to attendance at supposedly “elite” institutions, it can unfairly impact borrowers of color. Widespread adoption of educational criteria to determine creditworthiness will further stratify socioeconomic barriers to economic opportunity and mobility for Black and Brown consumers.
The use of education data in credit decisions also ignores the way most students actually select a college—more than 57 percent of incoming freshman attending public, four-year colleges enroll within 50 miles of home. Many of these students choose to stay close to home for college because of family responsibilities, cultural norms, or factors related to working while enrolled in school. This is especially true for Latino, Black, and Native American students. As a result, the use of institutional factors in credit decisions may have a disparate impact on Black and Brown communities.
Use of education data implicates fair lending law
Furthermore, given the gross disparities that exist across the education spectrum, the use of education data has significant fair lending implications. The Equal Credit Opportunity Act prohibits creditors from discriminating against applicants in any aspect of a credit transaction on the basis of characteristics such as race, color, and national origin.
A 2017 American Enterprise Institute report found that use of education criteria in underwriting decisions “tend to disparately affect protected classes of individuals,” also noting that “the quality or selectivity of the institution has only a slight effect on earnings.” Furthermore, the report notes that there is no available data that substantiates the necessity of including these factors in underwriting decisions or its relationship to the likelihood of repayment. This is cause for alarm where the risk of discrimination is so great.
For example, back in 2007, then-Attorney General Andrew Cuomo warned Congress about this educational “redlining.” An investigation found that private student lenders ranked colleges and universities by default rates and used this data to set interest rates. As part of the investigation Cuomo found that borrowers with “excellent” credit attending non-selective institutions were given higher interest rates than borrowers with less than “stellar” credit attending selective institutions. Cuomo noted, “just as lenders in the mortgage industry once made judgments about credit lending in entire neighborhoods as a whole, so too are lenders making generalized judgments about student and parent credit risk based on a student’s ‘school neighborhood.’”
Note that multiple federal enforcement agencies have now stated that certain educational based cohort-related factors create discriminatory ECOA risk or violations.
Lawmakers must scrutinize the use of this data before it’s too late
Despite the buzz being generated by fintech companies, we must remember that all innovation is not inherently good for consumers. Subprime lending was first marketed in the early 2000s as an innovative financial product to serve underserved borrowers. Before that, payday loans were touted as a necessary product to allow vulnerable consumers quick access to small dollar loans. Now, credit products using education data are being marketed as innovative products to expand access to credit.
We must also remember that this is broader than private student loans—this is broader than student debt. The ramifications of education data in underwriting extend across consumer financial products, and therefore across consumers’ lives.
It is frightening to imagine a future where graduates of my alma mater and those alike could be thrown into a second class credit market simply because of the college we attended. We must not further the stratification of economic and racial disparities in this country in the name of purported innovation. It is important that our lawmakers seriously examine a system that could potentially penalize a second-generation Latina student who opts for the MSI (minority-serving institution) close to home so she can help care for her sick grandmother instead of going to an Ivy League institution on the other side of the country. We must ensure that a former foster youth is not penalized when buying his first home simply because he chose to become a teacher.
In closing, we cannot allow a future where borrowers—and in particular borrowers of color—pay more for, or are denied credit, simply based on who sits next to them in a classroom. I strongly urge lawmakers and regulators to explore the risk to consumers and potential biases that education data may introduce to the credit market. If we allow these practices to take root, we risk further marginalizing Black and Brown borrowers.
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Aryn Bussey is an education policy expert and strategist. Aryn credits her efforts to create the White House Initiative on Educational Excellence for African-Americans as her greatest professional accomplishment to date.