Fair lending monitoring models

Abstract

This chapter presents an overview and some major insights into modeling approaches of a very important regulatory risk for institutions that engage in credit activities: fair lending risk. Regulatory agencies have defined protected classes or prohibited basis under the Equal Credit Opportunity Act (ECOA) and Fair Housing Act (FHA). Failure to comply with fair lending rules can expose the institution to reputation risk, legal risk, enforcement action, and fines from different regulatory agencies. We present some of the quantitative challenges in detecting and measuring this kind of risk and give a different modeling approach that addresses some of these challenges.