Resource: Discriminatory Effects of Credit Scoring on Communities of Color

This Article focuses primarily on the use of credit scores by lenders, not other industries. It provides an abbreviated overview of other critical issues facing consumers in regard to credit scoring and reporting. These issues are significant and help to demonstrate the urgent need to reform this system. For example, credit-scoring systems are based on information obtained from consumer credit reports, even though credit reports are often rife with errors that are difficult to correct. Credit-scoring systems are also a mystery to consumers because credit-scoring companies maintain that their systems are proprietary and cannot be revealed. These issues are covered in great detail by recent reports by Demos and the Consumer Financial Protection Bureau (CFPB), and a survey by the Consumer Federation of America and VantageScore.

Fixing our current credit-scoring system is not only a moral imperative consistent with our national policies and beliefs about fairness and justice; it is also a legal obligation as outlined by the Fair Housing Act and the Equal Credit Opportunity Act. We hope this Article will assist with the dialogue at this conference as well as our national dialogue on how to move forward and out of our financial and foreclosure crises.

This Article begins with a discussion of the historical discrimination that led to our dual credit market, including subprime lending and the foreclosure crisis. Next, this Article contains a detailed analysis of why credit scoring has a discriminatory impact. Then it discusses the legal obligations that the federal government and the financial industry have to promote fair housing. Finally, it offers recommendations for how to fix our broken approach to credit scoring.