algorithmic credit scoring lux final...aggarwal, ‘machine learning, big data and the regulation of...
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Algorithmic Credit Scoringand the
Regulation of Consumer Credit Markets
Nikita AggarwalUniversity of Oxford, Faculty of Law + Oxford Internet Institute
9 October 2019, Luxembourg
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Overview 1. Rise of algorithmic credit scoring
2. Impact on consumer credit markets
3. Implications for consumer credit regulation
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Algorithmic Credit Scoring1. Assessing Creditworthiness
using: 2. 1. Alternative Data
1. +2. Machine Learning
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Impact on Consumer Credit Markets
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Impact depends on trade-off between and within different normative goals:
1. Efficiency2. Distributional Fairness
3. Consumer Financial Privacy
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Efficiency Faster, cheaper, more accurate risk
assessment (thin-files) Exploitation of consumer ignorance
Over-reliance on quantitative measurement
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Distributional Fairness
Access to credit (thin-files)Reduce discrimination due to animus
Algorithmic discrimination, Hirshleifereffects, exploitation and rent-seeking
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Consumer Privacy, AutonomyAccess to credit supports financial autonomy
Over-reliance on predictions from (group) data diminishes individual autonomy
Re-use of personal data without ‘informed’ consent
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Additional Dimensions• + ML and Big Data as consumer-helping
solutions?• + ML and Big Data as supervisory solutions
(suptech/regtech)?
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Empirical Findings
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Bartlett et al (2019)*Algorithmic lending eliminates discrimination in loan origination, relative to face-to-face lending.
*Doesn’t eliminate discrimination in loan pricing, but still reduces due to greater competition from FinTech lending platforms.
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Fuster et al (2018)*ML credit scoring increases accuracy of default prediction relative to simple logistic models, and increases access to credit.
*But gains unevenly distributed: (i) accuracy gains accrue disproportionately less to Black and Hispanic borrowers; (ii) disparity in interest rates between and within groups increases, more for Black and Hispanic.
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Jagtiani and Lemieux (2017, 2018)*Alternative information improved access to credit — for the same risk of default, Lending Club consumers pay smaller spreads.
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Implications for Consumer Credit Regulation
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1. ML model and product governance
2. Consumer financial privacy
3. Credit information market
3 priorities
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* Updated regulatory standards for ML model risk management (cf. SR 11-7, MiFID II, GDPR)
* Model interpretability, alternative data, vendors
*AI/ML corporate governance structure for firms, including (human) accountability and liability.
* Senior managers and certification regime (UK)
ML Governance
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Consumer Financial Privacy
What is the appropriate level of consumer privacy in credit markets?
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* Data protection (GDPR) –vs– consumer credit laws?
* Ethical Considerations?
* Privacy-preserving techniques and user control over data?
Consumer Financial Privacy
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*Incorporate alternative data and insights:
à Information sharing arrangements (Lenders <> CRAs)
à Credit reports
Credit Information Market
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Aggarwal, ‘Machine Learning, Big Data and the Regulation of Consumer Credit Markets: The Case of Algorithmic Credit Scoring’ in Aggarwal et al (eds), Autonomous Systems and the Law (Beck 2019) 37.
Aggarwal, ‘Big Data and the Obsolescence of Consumer Credit Reports’ (2019) Clifford Chance Talking Tech.
Bartlett et al, Consumer Lending Discrimination in the FinTech Era (2019) https://ssrn.com/abstract=3063448
Fuster et al, Predictably Unequal? The Effects of Machine Learning on Credit Markets (2018) https://ssrn.com/abstract=3072038
Jagtiani and Lemieux, Fintech Lending: Financial Inclusion, Risk Pricing, and Alternative Information (2017) FRB of Philadelphia Working Paper No. 17-17
Jagtiani and Lemieux, The Roles of Alternative Data and Machine Learning in Fintech Lending: Evidence from the Lending Club Consumer Platform (2018) FRB of Philadelphia Working Paper No.18-15
References