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Consumer credit in the age of AI: Beyond anti-discrimination law

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  • Langenbucher, Katja

Abstract

Search costs for lenders when evaluating potential borrowers are driven by the quality of the underwriting model and by access to data. Both have undergone radical change over the last years, due to the advent of big data and machine learning. For some, this holds the promise of inclusion and better access to finance. Invisible prime applicants perform better under AI than under traditional metrics. Broader data and more refined models help to detect them without triggering prohibitive costs. However, not all applicants profit to the same extent. Historic training data shape algorithms, biases distort results, and data as well as model quality are not always assured. Against this background, an intense debate over algorithmic discrimination has developed. This paper takes a first step towards developing principles of fair lending in the age of AI. It submits that there are fundamental difficulties in fitting algorithmic discrimination into the traditional regime of anti-discrimination laws. Received doctrine with its focus on causation is in many cases ill-equipped to deal with algorithmic decision-making under both, disparate treatment, and disparate impact doctrine. The paper concludes with a suggestion to reorient the discussion and with the attempt to outline contours of fair lending law in the age of AI.

Suggested Citation

  • Langenbucher, Katja, 2022. "Consumer credit in the age of AI: Beyond anti-discrimination law," LawFin Working Paper Series 42, Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin).
    • Handle: RePEc:zbw:lawfin:42
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    References listed on IDEAS

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    More about this item

    Keywords

    credit scoring methodology; AI enabled credit scoring; AI borrower classification; responsible lending; credit scoring regulation; financial privacy; statistical discrimination;
    All these keywords.

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • K33 - Law and Economics - - Other Substantive Areas of Law - - - International Law
    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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