Re: Credit scoring again??
In message Tue, 1 Nov 1994 19:54:30 -0500, "GARY DYMSKI" [EMAIL PROTECTED] writes: In message 27 Oct 1994 12:31:38 -0700, pat mason [EMAIL PROTECTED] writes: Credit scoring is simply one of many possible methods of assessing creditworthiness. As a practical matter, credit scoring is most often used by larger institutions for smaller credit, say credit cards offered by a national credit card bank. However, I have heard the idea being brought out as a way to justify charging higher rates for an institution planning to expand into low income communities. What would make any creditworthiness assessment technique illegal is this: if it involves using any of the protected categories under the US's anti-discrimination laws. By and large, this refers to the amendments to the Constitution that have determined that due process protects people from being singled out on the basis of (cet. par) race, gender, and age. That is, it is illegal to give people a "score" using this category. In my understanding it is also illegal to give people a score that results in "disparate treatment", that is if the resulting lending patterns show bias even if the scoring method does not directly. The representation of this approach is "redlining" in which an area is "redlined" because of perceived risk. This Guttentag/Wachter article was the first to thus indicate the possibility of what these authors termed "rational discrimination". A large bank in the DC area recently settled out of court in a case involving their lending patterns in the suburbs vs the City. The settlement required the bank to open branches and agree to provide services in the "redlined" area. While the discrimination as the bank practiced it may have been rational, this rational (but illegal) policy had bottom line consequences. No bank would admit to using this, because of the illegality involved. So no banking text would discuss it either. Does it happen? HMDA data indicates quite strongly that discrimination is a part of the banking marketplace. Why shouldn't any community expect to have their bank reinvest in the community? A recent study by the Woodstock Institute of Chicago indicates that the perceived default risk of mortgage lending in low income communities does not represent a real risk. Lenders to low income housing have as good a record as lenders to the middle class and a better record that lenders to non-owner occupied units. ** William Myers Alternatives Federal Credit Union 301 West State Street, Ithaca, NY 14850-5431 (607) 273-3582 ext 817, FAX 277-6391 [EMAIL PROTECTED] *
Re: Credit scoring again??
In message 27 Oct 1994 12:31:38 -0700, pat mason [EMAIL PROTECTED] writes: Doug, I don't know if he's still on the list, but Gary Dymski would be a good source for this question. Also, try and contact Tim Bates at Wayne State. patrick "Murray and Hernnstein are racist pigs" mason Greetings, Banking fans, Since my old partner Patrick "m.a.h.a.r.p." Mason has suggested I get off my bottom and reply to your query (a second time through!), let me try. Credit scoring is simply one of many possible methods of assessing creditworthiness. There is no reason that scoring -- assigning numerical values to loan applicants -- is per se legal or illegal. What would make any creditworthiness assessment technique illegal is this: if it involves using any of the protected categories under the US's anti-discrimination laws. By and large, this refers to the amendments to the Constitution that have determined that due process protects people from being singled out on the basis of (cet. par) race, gender, and age. That is, it is illegal to give people a "score" using this category. Do banks do it? Might they? Sure. The reason is, that race (eg) could easily be highly correlated with a variety of real "economic" factors such as, probability of job loss, credit history, job history, etc. In effect, by using "race" as a flag (giving it a "score") the lender could economize on its information-gathering costs (and not have to gather other information on applicants). The same logic would suggest that racial composition of an area would be a proxy for economic conditions in a particular locale. This very practice was singled out by Guttentag and Wachter in a 1981 report for the NYU Business School (published, I think, in pamphlet as "Redlining and Bank Credit"). This Guttentag/Wachter article was the first to thus indicate the possibility of what these authors termed "rational discrimination". The idea of "rational discrimination" has just resurfaced in the latest JMCB, in an article by Calomiris et al on federal credit programs. Now, this rationality rests on the use of a protected category as a short-hand way of economizing on information-extraction costs. Strictly illegal. But possible. No bank would admit to using this, because of the illegality involved. So no banking text would discuss it either. Does it happen? You can't ask a bank. So there is a black-hole aspect to Doug Orr's question. The experts can't ask this question of the lenders, without getting a "cold shoulder" in response. Rumors that banks use all kinds of things, including neural-network algorithms into which are poured variables ranging from applicant race to zip code to age of housing stock to ... But try to get Bank of America or even your local bank to tell you their formula. They won't. You'll get reams of material, but none that will get to the heart of your question. BTW, in a working paper for UCR I go into some of this. Included within is a discussion of several items of possible interest: (1) the ambiguity of the very definition of "discrimination" in a multi-factor market setting; (2) the importance of strategic interaction and spillover effects in credit-market outcomes; (3) the importance of path dependence in creating racial differences in credit flows. There are a lot of matters to think through, and the model I set out in my working paper only barely breaks the surface of what appears to be a huge set of inadequately-explored issues. People who are interested in the working paper can ask for it by e-mailing me directly at [EMAIL PROTECTED] Gary Dymski Gary A. Dymski[EMAIL PROTECTED] Dept. Of Economics-Highlander Hall(909) 787 - 5037 ext 1570 University of California Riverside, CA 92521 USA
Re: Credit scoring again??
Bob, What do you mean by " any credit-scoring system be statistically sound"? My emphasis is on the "statistically sound." Fikret.
Credit scoring again??
Come on now!! I can't believe nobody on this network knows in which cases credit scoring is legal, and in which it is not. So, a repeat of my early request. If I don't get any responses this time, I'll give up! (Doug Henwood, have you vowed silence again??) The issue of credit scoring came up in my money and banking class. The eight textbooks I have on my shelf disaggree on the topic. Several say that the practice in equivalent to statistical discrimination and is illegal. Others, say that it only "looks" like statistical discrimination and is still a legal practice. Does anyone know for certain which is right? If it IS still legal, it creates a major barrier to women in the credit markets, which definitely tips the "playing field" against women and women owned businesses. If it is illegal, does anyone know which section of the Justice dept handles these cases. Also, if it is illegal, does anyone know why auto dealers still use credit scoring as their primary determenent in making car loans? Do they have some sort of exemption? Doug Orr [EMAIL PROTECTED]
Re: Credit scoring again??
The _Equal Credit Opportunity Act_ requires that any credit-scoring system be statistically sound. ECOA does not allow credit scoring models to grade race, relision, sex, or national origin. Does this guarantee there will be no discrimination? On Thu, 27 Oct 1994 [EMAIL PROTECTED] wrote: Come on now!! I can't believe nobody on this network knows in which cases credit scoring is legal, and in which it is not. So, a repeat of my early request. If I don't get any responses this time, I'll give up! (Doug Henwood, have you vowed silence again??) The issue of credit scoring came up in my money and banking class. The eight textbooks I have on my shelf disaggree on the topic. Several say that the practice in equivalent to statistical discrimination and is illegal. Others, say that it only "looks" like statistical discrimination and is still a legal practice. Does anyone know for certain which is right? If it IS still legal, it creates a major barrier to women in the credit markets, which definitely tips the "playing field" against women and women owned businesses. If it is illegal, does anyone know which section of the Justice dept handles these cases. Also, if it is illegal, does anyone know why auto dealers still use credit scoring as their primary determenent in making car loans? Do they have some sort of exemption? Doug Orr [EMAIL PROTECTED]
Re: Credit scoring again??
Doug, I don't know if he's still on the list, but Gary Dymski would be a good source for this question. Also, try and contact Tim Bates at Wayne State. patrick "Murray and Hernnstein are racist pigs" mason
Re: Credit scoring again??
Duh, I dunno. I ain't taken no vow of no silence, but I dunno. Guess I've been watching too much Beavis and Butt-head. Call Larry Lindsay at the Fed! Doug Doug Henwood [[EMAIL PROTECTED]] Left Business Observer 212-874-4020 (voice) 212-874-3137 (fax) On Thu, 27 Oct 1994 [EMAIL PROTECTED] wrote: Come on now!! I can't believe nobody on this network knows in which cases credit scoring is legal, and in which it is not. So, a repeat of my early request. If I don't get any responses this time, I'll give up! (Doug Henwood, have you vowed silence again??) The issue of credit scoring came up in my money and banking class. The eight textbooks I have on my shelf disaggree on the topic. Several say that the practice in equivalent to statistical discrimination and is illegal. Others, say that it only "looks" like statistical discrimination and is still a legal practice. Does anyone know for certain which is right? If it IS still legal, it creates a major barrier to women in the credit markets, which definitely tips the "playing field" against women and women owned businesses. If it is illegal, does anyone know which section of the Justice dept handles these cases. Also, if it is illegal, does anyone know why auto dealers still use credit scoring as their primary determenent in making car loans? Do they have some sort of exemption? Doug Orr [EMAIL PROTECTED]
