How to Guard Against Indirect Lending Disparate Impact

Posted by Kristina Quinn

The materials available in this article are for informational purposes only and not for the purpose of providing legal advice. You should contact your own advisors with questions regarding the content herein. The opinions expressed in this article are the opinions of the individual author and may not reflect the opinions of MeridianLink, Inc.

Credit unions require constant vigilance against disparate lending practices. Specifically, there is a need to ensure that different members are given fair and equal treatment through all lending services. This goal is simple in theory but sometimes challenging in practice; to that end, MeridianLink recently hosted a webinar, providing our credit union and banking clients with digital banking tips and best practices for avoiding disparate impact in indirect lending.

We invite you to catch up on the webinar today.


Here’s a quick synopsis:

Guarding Against Disparate Impact

Our ultimate goal is to provide credit union lending software/bank lending software that can equip financial professionals to adhere to current regulations, and to ensure that all consumers are treated with equality.

The Role of Compliance

There are two primary regulations on the books that can help credit unions and banks avoid disparate impact.

  1. Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) legislation prevents intentional practices that can lead to disparity, such as deceptive marketing offers, abusive collection tactics, and disproportionate pricing for services rendered.
  2. The Regulation B & Equal Credit Opportunity Act (ECOA) guards against unintentional deceptions, which might include subjective dealer mark-ups in indirect lending.

Where Disparate Impact Happens

Banks and credit unions should be aware that disparate impact can occur in all aspects of lending. Some examples include:

  • Strategy, Models, Attribute, Indirect Lending, Direct Lending
  • When creditors implement seemingly neutral policies or practices that have a negative effect on a member of an EOCA protected class.
  • Race/Ethnicity, Age 62+, Gender, Social Security Income, etc.

Disparate impact happens even at institutions that have otherwise positive records and strong reputations… which is to say, it can happen anywhere. For example, the Apple Card has been accused of gender bias (they gave lower credit limits to men than to women). And, Optum was accused of racial bias in their triage algorithm. Now, they are in trouble for not being proactive to find these biases.

Addressing and Preventing Disparity

The good news is, there are some proven strategies for addressing and preventing unintentional disparity. Consider these tips as you think about your digital lending services:

  • Practice proactive monitoring and corrective action (our credit union software or bank software can help)
  • Develop an annual rhythm of auditing yourself for any instances of disparity
  • Engage in regulatory scrutiny; look into your lending practices as though you are the regulator.
  • Seek data driven findings. You can’t just sample people; findings must be based on your data. (Again, the right digital lending software will help with this.)
  • Analyze loan terms by ECOA categories.
  • Infer gender, race, and ethnicity.
  • Test for statistical significance.
  • Identify mitigating factors.
  • Monitor for changes.

Key Takeaways for Credit Unions and Banks

It’s crucial to understand that financial institutions participating in indirect lending are responsible for the actions of the third party and must ensure that there is no discrimination/disparate impact. 

We’d love to provide you with further information about how our software can help you achieve this goal. Learn about MeridianLink’s analytics and deep dive analytics process today. 

Topics: Indirect lending for credit unions, mobile lending, digital lending, direct lending

Written by Kristina Quinn

Director of Product Marketing, MeridianLink

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