Discrimination in Underwriting

by Leanne Minghini, CRCM, FLE

When you walk into a financial institution to apply for an auto loan, you will be required to fill out an application providing necessary information for the loan decision. The next step is the underwriting process, which involves assessing various factors such as credit report, debt-to-income ratio, collateral age, loan-to-value ratio, and other criteria like employment and residency duration. This information enables the financial institution to make a well-informed loan decision. 

Despite having specific underwriting guidelines that should eliminate discrimination, it is important to acknowledge that discrimination can still occur at different stages of the loan process. Let’s consider an example where the institution’s underwriting policy states that no credit score below 620 will be accepted. However, an exception is made for the President’s daughter’s best friend, who has a credit score of 600. This exception introduces discrimination into the underwriting process and increases the institution’s risk.

To address potential discrimination, it is crucial to analyze data for any disparities that may arise. It is normal for institutions to have some disparities, but if there are loan exceptions, they should be supported by valid mitigating factors and not solely applied to a specific group.

Utilizing third-party software for matched pair testing can help mitigate these exceptions. By thoroughly analyzing data, institutions can gain a better understanding of disparities and take proactive measures to minimize the risk of discrimination.