This report details a fair lending analysis of Aurora Financial Partners' (“Aurora”) loan underwriting and pricing practices. The analysis, conducted by Premier Insights, Inc.(“Premier”) investigated potential disparities in loan approvals and interest rates based on race and gender. Using regression models, the study found statistically significant disparities in credit card denial rates for Hispanic applicants and significant pricing discrepancies in motor vehicle, secured, and unsecured loans for Black and/or female applicants. Limitations due to data availability were acknowledged, and a file review was recommended to further investigate these findings. The report concludes that while disparities exist, further investigation is needed to determine the extent to which data limitations contribute to the observed results.
This case study is intended to illustrate Premier Insights, Inc.'s analytical capabilities. The names of the financial institution and market areas have been changed for confidentiality purposes.
Introduction
Premier conducted a comprehensive fair lending analysis for Aurora, a financial institution serving the greater Midwest market. This study focused on identifying potential disparities in loan underwriting and pricing practices related to protected borrower classes. The goal was to provide Aurora with an objective assessment of its lending practices and identify any areas needing attention.
Data and Methodology
- Data Source: Aurora provided anonymized data for consumer loan applications for a one-year period. This data included loan application details and borrower demographic information.
- Loan Types: The analysis covered six loan categories: home equity, motor vehicle, credit card, secured, unsecured, and other.
- Protected Classes: The study examined potential disparities for four protected classes: Black borrowers compared to non-Hispanic White borrowers, Hispanic borrowers compared to non-Hispanic White borrowers, Asian borrowers compared to non-Hispanic White borrowers, and female borrowers compared to male borrowers.
- Proxy Data: Because government monitoring information is not gathered for consumer lending, proxy data provided by Aurora was utilized to classify borrowers by race and gender.
- Analysis Techniques: Regression analysis was employed to assess both underwriting (denial rates) and pricing (interest rates) while controlling for other relevant factors. The regression models were based on rate sheet and underwriting criteria. The models were executed with and without accounting for relevant factors to show raw and conditioned differences.
- Pricing Measurement: The price of a loan was measured by the note rate.
Key Findings
Underwriting Analysis:
- Overall: For most loan types, no statistically significant disparities were found in denial rates.
- Credit Cards: A statistically significant disparity was found in credit card denial rates, with Hispanic applicants experiencing a 7-percentage point higher denial rate even after controlling for other factors.
- Example: The probability of denial for a Hispanic applicant was 23.4% versus 11.5% for a White applicant after relevant factors were considered in the analysis.
Pricing Analysis:
- HELOC: No statistically significant disparities were noted in conditioned contract note rates
- Motor Vehicle Loans: A statistically significant disparity in pricing was identified for Black borrowers, with an average increase of 123 basis points in the note rate after controlling for other factors.
- Example: After controlling for pricing factors, the average rate for White borrowers was 5.770% while for Black borrowers it was 7.001%.
- Credit Cards: Statistically significant pricing disparities were found for Hispanic and female borrowers. Hispanic borrowers received a benefit of 36 basis points, and females saw a benefit of 14 basis points.
- Example: After controlling for pricing factors, the average rate for White borrowers was 14.315% and for Hispanic borrowers, 13.953%. In the same analysis, after controlling for pricing factors, the average rate for male borrowers was 14.302% and for female borrowers, 14.158%.
- Secured Loans: Statistically significant disparities were found in the pricing of secured loans with Black borrowers facing a 122 basis point higher rate.
- Example: After controlling for pricing factors, the average rate for White borrowers was 5.280% and for Black borrowers, 6.503%.
- Unsecured Loans: Statistically significant pricing disparities were found with female borrowers experiencing an average increase of 57 basis points in their rate.
Limitations
The analysis was limited by the available data. Some factors that could influence loan decisions were not available, such as:
- Deposit relationship discounts
- Auto-debit enrollment discounts
- Other factors impacting credit decisions. These missing data points could potentially explain some of the disparities found, so further review is needed to fully understand the impact of these variables.
Conclusions and Recommendations
The analysis revealed some statistically significant disparities in both underwriting and pricing practices that warrant further investigation. Specifically:
- Credit Card Denials: Hispanic applicants were denied credit cards at a higher rate than white applicants after controlling for all relevant factors.
- Pricing Disparities: Black borrowers paid higher rates for motor vehicle and secured loans and female borrowers paid higher rates on unsecured loans.
Premier recommended that Aurora conduct a file review to supplement the findings of this analysis. This file review was intended to further explore the statistically significant disparities that were noted, and address the limitations that were a consequence of the available data.
Value of Premier Insights' Services
This case study highlights Premier’s ability to:
- Conduct thorough, data-driven fair lending analyses.
- Identify statistically significant disparities in lending practices that may be of concern to regulatory agencies.
- Provide objective insights into complex lending data.
- Offer actionable recommendations for improvement.
By partnering with Premier Insights, Inc. financial institutions can gain a deeper understanding of their lending practices, mitigate potential risks, and ensure fair and equitable access to credit for all borrowers.