Achieving equal treatment of credit applicants has been a legitimate concern of legislators and the credit industry. However, measures taken to date in attempting to comply with anti‐discrimination laws arguably do not allow for the most effective use of credit scoring models, and could run counter‐intuitive to the intention of legislation through indirect discrimination. The purpose of this paper is to offer an alternative interpretation that preserves the intention of legislation and also retains the integrity and effectiveness of credit scoring models.
The paper makes a legal analysis of anti‐discrimination laws in the UK, with US law as a comparison, aiming to demonstrate that concerns in using information protected under anti‐discrimination laws as variables may be misplaced, because nothing in these laws precludes the inclusion of all relevant variables in modelling.
The inclusion of variables representing protected characteristics in credit scoring models may not contradict current anti‐discrimination laws.
Limitations exist from the perspectives of customer relationship and the need for further checks and balances. Conclusive validation of the findings will need to come from the courts. The paper provides a springboard for empirical research on whether the inclusion of variables representing protected characteristics in credit scorecards continues to produce better decision‐making models.
The findings benefit credit risk modelling as a whole in facilitating the development of credit scorecards that are in compliance with anti‐discrimination laws, without sacrificing their effectiveness.
The paper presents a fresh perspective and alternative solution to legal concerns regarding the use of protected characteristics in credit scoring, which will be useful to the credit industry.
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