Lenders and laws regulating fair lending have been a target for discrimination for hundreds of years. Many times, certain groups of people are left without the opportunity to qualify for a loan. These audiences include people of color, those without higher educational degrees, immigrants, and younger generations with thin or nonexistent credit history. Since these underserved communities are viewed as those with the most risk, they are usually last in line in the lending process.Often, these people are labeled “underbanked”. This means that they don’t have a traditional credit score or have very little information in their credit files. These people find themselves stuck in a vicious cycle unable to get credit because they have no credit in their record or available. A flawed traditional scoring model is what is holding these potentially qualified applicants back from accessing loans. Banks, mortgage lenders, and FinTech startups are starting to leverage the vast amount of data available to more accurate, informed decision-making in lending. This is where artificial intelligence (AI) and machine learning (ML) have the potential to revolutionize the fair lending process as we know it today.
What is a loan?
Investopedia defines a loan as “money, property, or other material goods given to another party in exchange for future repayment of the loan value or principal amount, along with interest or finance charges.” There are many things to take into account with loans. For instance, loans with high-interest rates have higher monthly payments—or take longer to pay off—versus low-rate loans. Loans can be secured by collateral such as a mortgage or unsecured such as a credit card. Revolving loans or lines can be spent, repaid, and spent again, while term loans are fixed-rate, fixed-payment loans. There are also different types of loans, such as secured versus unsecured, and revolving versus term. Mortgages and car loans are secured loans, while credit card loans are typically unsecured or not backed by collateral. A credit card is an unsecured, revolving loan, whereas a home-equity line of credit (HELOC) is a secured, revolving loan.
