New Report Finds ‘Educational Redlining’ Penalizes Borrowers Who Attended Community Colleges and Minority-Serving Institutions, Perpetuates Systemic Disparities
Advocacy Organization Calls on Congress, Regulators to Crack Down on Consumer Lenders’ Use of Education Data, Warns of Fair Lending Abuses
February 5, 2020 | WASHINGTON, DC —The Student Borrower Protection Center (SBPC) today released a new report warning that financial companies’ use of individuals’ education history to screen borrowers for loans can penalize borrowers of color and community college students. The SBPC’s analysis of fintech and banking products uncovered cases where a prospective borrower may be hit with thousands of dollars in additional credit costs if he or she attended a community college, an Historically Black College or University (HBCU), or an Hispanic-Serving Institution (HSI). The advocacy organization is calling on Congress, federal and state regulators, and industry to examine these troubling practices and take action to halt discrimination.
The new report, titled Educational Redlining, is available here: https://protectborrowers.org/wp-content/uploads/2020/02/Education-Redlining-Report.pdf
“Our report shows that borrowers can be forced to pay a penalty because of who they sit next to in the classroom
,” said Seth Frotman, SBPC Executive Director and former top student loan official at the Consumer Financial Protection Bureau. “Despite assurances by these lenders that their practices lift up consumers from marginalized communities, our analysis shows that educational redlining can further drive disparities and inequality. It is time for law enforcement to act.”
Alternative data, or information such as cell phone payments or utility bills, is increasingly used in underwriting by the financial services industry, especially financial technology or “fintech” companies. Some financial companies have begun to use information about borrowers’ education history, including the identity or sector of the college or university a borrower attended, when determining access to and the cost of credit.
For years, policymakers have weighed the use of alternative data to help expand access to credit for marginalized or underserved communities. Although helping consumers trapped outside of the credit market is an important policy goal, regulators have made clear that certain data can also pose serious fair lending and discrimination risks by introducing unfair biases and perpetuating existing disparities.
The use of education data in credit decisions is particularly troublesome given the continuing pattern of disparate access to education in America and the historical inequality perpetuated by the use of this information. Widespread use of this data by lenders could reinforce systemic barriers to financial inclusion for black and Latinx consumers. For example, African American and Latinx students are especially underrepresented at the nation’s most selective colleges and universities, with nine percent and 12 percent, respectively, represented at the most prestigious public universities.
The use of education criteria in underwriting has raised significant fair lending concerns among lawmakers and regulators. For instance, in 2007, then-New York Attorney General Andrew Cuomo warned that the specter of educational redlining posed significant risks to borrowers of color and warranted immediate attention from lawmakers. Cuomo warned that the use of education criteria in underwriting decisions runs the risk of creating a tiered credit market based on non-individualized factors—favoring applicants for the “prestige” of their educational institutions rather than their individual creditworthiness.
Since that time, multiple federal enforcement agencies have weighed in on this issue, in one case finding that the use of certain educational factors violates federal anti-discrimination laws.
Mystery Shopping Uncovers Thousands of Dollars in Penalties Against Borrowers for Attending Community Colleges and Certain Minority-Serving Institutions
The SBPC examined a private loan product at a large bank and a private loan refinance product offered by a fintech lender. Using lenders’ publicly available online rate check tools, the SBPC tested loan applications from fictional borrowers from different schools while maintaining all other borrower characteristics constant (e.g., income, savings, occupation, loan amount). The sample credit estimates generated by the big bank indicated higher loan costs charged to borrowers for attending a community college. In the case of the fintech lender, higher costs were charged to a borrower who attended certain Minority-Serving Institutions (MSIs).
The companies used in the analysis are Wells Fargo and Upstart Network, Inc. Wells Fargo is one of the nation’s largest banks and the second-largest lender of new private student loans to college students. Upstart Network is a fintech company that uses machine learning and alternative data, including degree attainment, school attended, and area of study, in its underwriting processes.
Specific takeaways from the consumer case studies included in this report:
- A private student loan borrower may pay a penalty for attending a community college. Wells Fargo charges a hypothetical community college borrower $1,134 more on a $10,000 loan, when compared to a similarly situated borrower enrolled at a four-year college.
- A borrower who refinances student loans may pay a penalty for attending an HBCU. When refinancing with Upstart, a hypothetical graduate of Howard University, an HBCU, is charged $3,499 more over the life of a five-year loan when compared to a similarly situated NYU graduate.
- A borrower who refinances student loans may pay a penalty for attending an Hispanic-Serving Institution (HSI). When refinancing with Upstart, a hypothetical graduate who received a bachelor’s degree from New Mexico State University-Las Cruces, an HSI, is charged at least $1,724 more over the life of a five-year loan when compared to a similarly situated NYU graduate.
In this case study, the hypothetical borrowers attended institutions primarily serving Black and Latinx students were charged higher rates. Latinx students comprise nearly 59 percent of the student body at NMSU-Las Cruces. Similarly, black students comprise 89 percent of the student body at Howard, whereas less than 20 percent of the student body at NYU identify as Black or Latinx.
Minority-Serving Institutions, including HBCUs and HSIs, play a critical role in expanding access to higher education, particularly to underrepresented minorities. Approximately ten percent of black students in the United States attend HBCUs, and for much of the nation’s history, HBCUs were the only higher education institutions that admitted black students. HSIs are nonprofit, degree-granting colleges and universities where Latinx students comprise 25 percent or more of the student body.
In light of the troubling findings, the SBPC issued recommendations to policymakers and industry including:
- Congress must enhance oversight. Congress should examine the practice of using education data by consumer lenders, including potential disparities caused by this practice and its effects on economic inequality. Further, Congress should investigate regulators’ oversight over the companies engaged in these practices. This should include scrutiny of the Consumer Financial Protection Bureau’s handling of a No-Action Letter awarded to Upstart—a regulatory safe harbor that may be shielding the company from violations of federal fair lending laws.
- Federal and state regulators must take immediate action to halt abuses. Federal and state regulators should prioritize oversight over lenders that use education data when underwriting or pricing consumer loans and take immediate action where industry practices violate fair lending laws.
- The financial services industry must strengthen transparency when lending based on education data. The financial services industry should immediately publish data demonstrating the effects of these practices on individual borrowers, empowering lawmakers, regulators, and the public to understand the effects of these practices on consumers.
The Student Borrower Protection Center (www.protectborrowers.org) is a nonprofit organization focused on alleviating the burden of student debt for millions of Americans. SBPC engages in advocacy, policymaking, and litigation strategy to rein in industry abuses, protect borrowers’ rights, and advance economic opportunity for the next generation of students.
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