Entrepreneurs have long been an engine of our economy. Whether it’s a local restaurant or a small factory, making sure that good ideas turn into jobs and wealth is a key ingredient for strong and stable communities. For those willing to work hard and take a risk, a small-scale loan can be a key ingredient to make an entrepreneurial dream a reality. But I’m concerned that new lending companies aren’t taking the necessary steps to ensure that all Americans with a solid business idea — regardless of their race or ethnicity — are able to access fair and affordable business credit due to potentially discriminatory fintech algorithms.
Fintech companies are a new and innovative way to provide consumers and small businesses the opportunity to gain access to capital at lower costs than traditional banks by eliminating the “middleman.” However, with a relatively new and expanding model, it is critical that we be certain these innovative companies are not targeting those most susceptible to financial risks with predatory or discriminatory lending practices. There are serious concerns that some of these fintech companies are developing algorithms that may lead to outcomes that disproportionately harm minority-owned businesses.
It is no secret that throughout the history of our country, certain financial institutions, whether they are banks or nonbanks, have engaged in discrimination against communities of color. “Redlining” and other practices have been banned, but it is more difficult to determine whether fintech lenders using mysterious algorithms are treating all borrowers fairly. The fintech industry argues that algorithms reduce potential discrimination, but it has provided no data to support the claim.
While community banks underwrite small-business loans by meeting with their clients directly, fintech algorithms make decisions based on data of which the borrower may be totally unaware. For example, decisions could be made based on who they follow on Twitter, or the number of criminal records in their ZIP code.
Algorithms are designed by humans who may draw conclusions about a borrower on attributes that have nothing to do with their business idea. In order for us to have an economically mobile society, known to many as the American dream, small-business credit should be more focused on the quality of a borrower’s business plan, rather than on discriminatory characteristics of someone’s credit profile. If credit to fund ideas only flowed to those who are already wealthy, the American dream of economic mobility would be nonexistent.
We have already seen studies from researchers at Harvard and Carnegie Mellon about discriminatory outcomes and search results that algorithms can produce, and it is critical we understand why these outcomes happen and develop effective solutions.
We cannot allow any particular fintech company to make use of similar practices in order to coerce unknowing individuals into putting themselves at serious financial risk by taking on unfavorable loan rates. While banks are subject to examinations for compliance with fair-lending laws, fintech companies are not, so the concern remains that there is not a level playing field in fintech.
The Dodd-Frank Wall Street Reform and Consumer Protection Act authorizes the Consumer Financial Protection Bureau to collect data on small-business lending and enforce the Equal Credit Opportunity Act, an important civil rights law that protects against discrimination. It is simply wrong for lenders to take advantage of an individual for factors beyond their control, such as the color of their skin. If they are breaking the law, we need a strong CFPB to investigate them and hold them accountable.
Having served on the House Financial Services Committee for more than a decade, I know how important it is to make sure that we have responsible innovation that is fair for all, especially when it comes to entrepreneurial opportunity. I’ll be taking a close look at fintech lenders to make sure they’re holding up their end of the bargain, not just for my constituents in Missouri, but for every aspiring entrepreneur in the country.
Rep. Emanuel Cleaver II, D-Mo., is a member of the House Financial Services Committee.