Upstart Says It's Improving AI Models After Report Reveals Race Approval Disparities

Upstart Says It’s Improving AI Models After Report Reveals Race Approval Disparities

Online consumer lender Upstart Holdings says it is working to improve its artificial intelligence models after a law firm that monitors its fair lending compliance found approval rates of lower loans for black applicants.

Law firm Relman Colfax said in a recent report that he found significant disparities earlier this year in how often Upstart approved loans to non-Hispanic black and white borrowers. The disparities do not “in themselves demonstrate a fair lending breach” and are not unusual, the law firm wrote, but it recommended a “less discriminatory” model for Upstart to adopt.

The report highlights shortcomings in the San Mateo, Calif.-based fintech company’s loan decision model, which Upstart says is more inclusive than underwriting methods banks have long used. Achieved uses a range of so-called alternative data to assess a borrower’s creditworthiness, including a person’s education and work history, and often works with banks to make the loans.

In 2017, Upstart struck a deal with the Consumer Financial Protection Bureau that allowed it to pursue innovation with less concern about a fair lending crackdown, but the deal ended in June.

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In a written statement, the company says her role model approves 43% more black borrowers at lower interest rates than traditional credit scoring models. He also noted that the audit found there was no “pricing bias on our platform,” so borrowers pay the same interest rates regardless of origin.

But Upstart also said loan approval disparities for black applicants are “an industry-wide challenge driven by decades of racial inequities, including credit scores.”

“We believe our model is one of the most fair and inclusive in the market, and we are committed to continuing to work with Relman to improve it to ensure that we remain a leader in fair lending,” said Nat Hoopes, Head of Upstart Government and Regulatory Affairs. “We look forward to similarly transparent and rigorous testing being applied to all lenders – old and new – so that all Americans can access inclusive and affordable credit.”

The report stems from an agreement Upstart reached with the NAACP Legal Defense and Educational Fund and the Student Borrower Protection Center in December 2020, when Upstart agreed to establish Relman Colfax as monitor of its Fair Lending Practices. The deal follows a 2020 SBPC study that found higher borrowing costs for a sample of graduates from Howard University, a historically black institution, compared to a graduate from New York University. .

In a statement Friday, SBPC executive director Mike Pierce said “new evidence that Upstart’s model appears to discriminate against its black customers is completely unacceptable and demands immediate action.”

On Monday, Pierce added: “Assuming they stick with it, Upstart’s commitment to addressing evidence of discrimination in its model is commendable. Other industry players with similar disparities should take note of this. process.”

Hoopes, the head of Upstart, said: “There were no findings of unfair discrimination in our model. I know of no company more committed to rigorous fair lending testing and creating inclusive credit products than ‘Upstart.’

Borrower advocates had welcomed the agreement as a new way to systematically track whether AI models may have racial biases that make it more expensive for black customers to obtain credit. Relman Colfax’s report was his third on Upstart; an earlier report noted similar disparities but had not yet recommended an alternative approach.

Matthew Bruckner, a law professor at Howard University, credited Upstart with opening itself up to scrutiny and said it was likely “far from the only” company with such disparities.

Bloomberg News, for example, found that major approved mortgage lenders 87% of refinance requests from white applicants in 2020 and only 71% from black applicants. The disparities were particularly evident at Wells Fargo, which approved 72% of refinance applications from white applicants and only 47% from black applicants. Wells Fargo, which has called analysis “simplified to the extreme”, has since been prosecuted for these discoveries.

Bruckner, of Howard University, called for “strong public oversight” of fair lending in banks and non-banks. Such a commitment would involve making significant investments in data scientists who can perform analysis for regulators such as the Consumer Financial Protection Bureau and state attorneys general, Bruckner said.

Bruckner also argued that the law firm’s findings show a potential loophole in so-called no-action letters from regulators such as the CFPB. In 2017, the Consumer Affairs Office entered into a non-action agreement with Upstart that allowed the company to pursue innovation without worrying about a regulatory crackdown.

This arrangement ended in June, when Upstart requested the end of the no-action letter to “keep our risk models accurate and up-to-date during a time of significant economic change.”

The discrepancies found by the law firm occurred during the first quarter of 2022 and “on one set of data” from the third quarter of 2021, while Upstart remained subject to the no-action letter.

In a 2019 blog post Regarding the no-action letter, CFPB officials wrote that they were testing whether the company’s models resulted in “greater disparities than the traditional model with respect to race, ethnicity, gender or age”.

The agency wrote that its testing showed “no disparities requiring further analysis of Fair Lending under the compliance plan.”

Upstart is part of a new organization called MoreThanFair focused on using technology to make lending more inclusive, while ensuring AI models are “properly supervised and rigorously tested,” according to its website. The group, which launched this month, includes other AI-powered lenders such as Oportun Financial and LendingClub, as well as community groups such as the National Community Reinvestment Coalition, the National Consumer Law Center and the group Latin American civil rights activist UnidosUS.

“Overcoming decades of inertia in access to credit is a huge challenge, so we are fortunate to be joined in this effort by a diverse group of leading organizations,” said CEO and Co-Founder of Upstart, Dave Girouard, in a press release announcing the band. launch.

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