Does Credit Scoring Produce a Disparate Impact?

52 Pages Posted: 18 Dec 2010

See all articles by Robert B. Avery

Robert B. Avery

Board of Governors of the Federal Reserve System

Kenneth P. Brevoort

Board of Governors of the Federal Reserve System

Glenn B. Canner

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: October 12, 2010

Abstract

The widespread use of credit scoring in the underwriting and pricing of mortgage and consumer credit has raised concerns that the use of these scores may unfairly disadvantage minority populations. A specific concern has been that the independent variables that comprise these models may have a disparate impact on these demographic groups. By "disparate impact" we mean that a variable's predictive power might arise not from its ability to predict future performance within any demographic group, but rather from acting as a surrogate for group membership. Using a unique source of data that combines a nationally representative sample of credit bureau records with demographic information from the Social Security Administration and a demographic information company, we examine the extent to which credit history scores may have such a disparate impact. Our examination yields no evidence of disparate impact by race (or ethnicity) or gender. However, we do find evidence of limited disparate impact by age, in which the use of variables related to an individual's credit history appear to lower the credit scores of older individuals and increase them for the young.

Keywords: credit scoring, disparate impact, discrimination, consumer credit

JEL Classification: G21, J1, J71, R20

Suggested Citation

Avery, Robert B. and Brevoort, Kenneth and Canner, Glenn B., Does Credit Scoring Produce a Disparate Impact? (October 12, 2010). Available at SSRN: https://ssrn.com/abstract=1726601 or http://dx.doi.org/10.2139/ssrn.1726601

Robert B. Avery

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2906 (Phone)
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Kenneth Brevoort (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Glenn B. Canner

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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