{"id":459,"date":"2023-10-13T12:39:34","date_gmt":"2023-10-13T12:39:34","guid":{"rendered":"https:\/\/connectwithfund.com\/tech\/who-has-fairness-obligations-in-the-banking-as-a-service-ecosystem\/"},"modified":"2023-10-13T12:39:34","modified_gmt":"2023-10-13T12:39:34","slug":"who-has-fairness-obligations-in-the-banking-as-a-service-ecosystem","status":"publish","type":"post","link":"https:\/\/connectwithfund.com\/?p=459","title":{"rendered":"Who Has Fairness Obligations In The Banking-As-A-Service Ecosystem?"},"content":{"rendered":"
\n

Pop quiz:<\/p>\n

Which players in the Banking-as-a-Service (BaaS) ecosystem \u2014 sponsor banks, fintechs, lead generators and middleware providers \u2014 are fair game for today\u2019s regulatory crackdown on bias in lending?<\/p>\n

If you answered \u201call of the above,\u201d you\u2019d be right. <\/strong><\/p>\n

Today, plenty of fintechs, lead generators, middleware providers and other players in the BaaS world think that, since they aren\u2019t formally lenders, they\u2019ll be spared scrutiny of any discriminatory outcomes in the loans they facilitate. Some also believe that the fairness and non-discrimination obligations of a lending program are managed well enough through their sponsor bank\u2019s compliance programs.<\/p>\n

As such, these firms seem to believe that fairness is the sponsor bank’s problem, not theirs.<\/p>\n

They\u2019re wrong.<\/strong><\/p>\n

As lending programs in the BaaS ecosystem are increasingly facilitated by a wide range of technology providers, regulators are cracking down on potentially unfair or discriminatory outcomes caused by anyone in the banking process\u2014including non-bank fintechs, lead generators and middleware providers.<\/p>\n

<\/fbs-ad><\/p>\n

Regulators are also increasingly imposing fairness obligations on business practices that are not credit-related, on the grounds that even neutral policies that have disparate outcomes can be illegal, including where fair lending laws don\u2019t apply.<\/p>\n

How can regulators do this? Let\u2019s look at the law.<\/p>\n

The Equal Credit Opportunity Act (ECOA) prohibits discrimination by creditors against applicants in any aspect of a credit transaction<\/strong>.<\/p>\n

Courts and regulators interpret ECOA to prohibit even neutral-seeming practices that have a \u201cdisparate impact\u201d on protected classes unless the creditor has a legitimate business justification for the practice that cannot reasonably be achieved in a less discriminatory manner.<\/p>\n

Regulation B, which implements ECOA, defines a \u201ccreditor\u201d as including a non- lender who \u201cregularly participates in a credit decision.\u201d The definition includes anyone who \u201cregularly refers applicants or prospective applicants to creditors or selects or offers to select creditors to whom requests for credit may be made.\u201d<\/p>\n

In other words, ECOA applies not just to the named lender but also to a broader swath of entities involved in the credit granting process.<\/p>\n

As a result, fintechs, lead generators, middleware companies and other firms can be subject to ECOA\u2019s rules. <\/strong><\/p>\n

And it\u2019s not just ECOA that BaaS ecosystem players need to worry about.<\/p>\n

The CFPB is likely to appeal a recent court ruling that struck down a 2022 update to its financial institution examination manual which had been amended to say that a business process causing disparate outcomes could be deemed \u201cunfair\u201d even where ECOA doesn\u2019t apply if<\/strong> it harms consumers in ways that they cannot avoid and lacks benefits that outweigh the harm.<\/strong><\/p>\n

In announcing the update, the CFPB stated that examiners would more \u201cclosely examine financial institutions\u2019 decision-making in advertising, pricing, and other areas to ensure that companies are appropriately testing for and eliminating illegal discrimination.\u201d<\/p>\n

The CFPB has also warned that it can sue “material” service providers<\/strong> to financial companies for failure to comply with applicable consumer financial protection laws.<\/strong><\/p>\n

What\u2019s more, BaaS providers, lead generators and fintechs can\u2019t necessarily assume that their bank partners\u2019 fairness compliance programs are sufficient for their own needs.<\/p>\n

A leading fintech sponsor bank is operating under a regulatory consent order which restricts them from onboarding new fintech partners or launching new fintech products until they\u2019ve enhanced their fair lending controls.<\/p>\n

The constraints imposed by this consent order demonstrate that a sponsor bank’s regulatory challenges can hamper its partners\u2019 growth and that BaaS players who have interdependence in business also have a shared responsibility for fairness.<\/p>\n

Moreover, just as the BaaS ecosystem requires coordination among its participants, it can also be fragmented. The number of players in any given BaaS partnership can increase the risk of unintentional non-compliance. For example, if one player adjusts its practices in some way, it might inadvertently create or exacerbate disparities for other partners.<\/p>\n

At the same time, not every disparity is a fairness violation.<\/strong> The CFPB\u2019s staff commentary to Reg B, which implements the ECOA, says that a practice that has disparate effects on a prohibited basis may nevertheless not be prohibited if it \u201cmeets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact.<\/u>\u201d In addition, a practice may not be unfair if it is reasonably avoidable and has benefits that outweigh the alleged harm.<\/p>\n

So what should non-bank BaaS players do?<\/p>\n

Simple: Assume You Have Fairness Obligations, Because You Probably Do.<\/strong><\/p>\n

Here are 6 steps for non-bank BaaS companies to create or improve a strong Fairness Compliance Program:<\/u><\/p>\n

1. Act Now<\/h2>\n

Today<\/strong> is the best time to implement a fairness compliance program<\/strong>. Fintech, lead generation and middleware providers can be subject to the ECOA as participants in loan transactions or as service providers, and regulators are increasingly acting on the belief that even unintentionally discriminatory policies can be illegal as \u201cunfair\u201d practices.<\/p>\n

Non-bank BaaS ecosystem players need a fairness compliance program that is proportional to the potential disparities that might result from activities they perform. And they need it now.<\/strong><\/p>\n

2. Identify Practices that Might Cause Unfair Outcomes<\/h2>\n

You can\u2019t measure what you don\u2019t know, so start off by identifying any business practices that could cause disparate outcomes for protected classes. Because regulators are scrutinizing a broad swath of activities, BaaS players can\u2019t limit their fairness audits to decisions about credit underwriting and pricing.<\/p>\n

Also on regulators\u2019 radar is the expanding adoption of technology for lead generation, digital marketing, fraud prevention, loan servicing, debt collection, and other non-credit functions used to offer or provide financial services to consumers.<\/p>\n

Because disparities in any aspect of any financial transaction can be \u201cunfair,\u201d any activity that may result in materially different outcomes for historically underserved groups probably ought to be evaluated for fairness.<\/strong><\/p>\n

Another Best Practice is to risk-rank the business processes that you\u2019ve identified based on their likely consumer impact<\/strong> and to focus on the higher- risk items first. For example, a practice that might cause historically underserved groups to be charged higher interest rates for a loan probably seriously harms those consumers, while a practice that sends relatively fewer debt collection notices to a historically underserved group might cause only minor harm, or perhaps no harm at all, to consumers.<\/p>\n

3. Gather Your Data and Put It to Work<\/h2>\n

Once you\u2019ve identified the practices that you intend to evaluate, consider what data is available to you and what outcomes should be measured. There\u2019s no one-size-fits-all way to measure disparities.<\/p>\n

While the outcomes that need to be evaluated are sometimes obvious, like whether applicants from different racial or ethnic groups are approved at different rates, the potentially disparate outcomes of some business practices can be subtle and require additional thought. <\/strong><\/p>\n

For example, if a marketing algorithm offered Black and White consumers different products or targeted advertisements primarily to certain demographic groups, or a servicing practice discouraged female applicants from gaining certain account benefits, or a fraud prevention vendor disproportionately flagged applications from older applicants, then the disparities that result could give rise to legal liability.<\/p>\n

4. Use Math to Identify Disparities<\/h2>\n

Once you have all the relevant data to run a fairness review, you\u2019ll need statistical analysis to evaluate fairness outcomes\u2014which generally requires specialized knowledge.<\/p>\n

Regulators have described the statistical methods that they use to assess the likelihood that a given applicant or customer belongs to a given demographic group.<\/p>\n

Companies can use these same methods to gauge disparities. There are also a range of measures that can be used to assess fairness outcomes, such as Adverse Impact Ratios, Standardized Mean Differences and Shapley Values.<\/p>\n

5. Search for Ways to Reduce Disparities<\/h2>\n

Just about every institution that looks for disparities finds them. But don\u2019t despair: disparities by themselves do not <\/strong>give rise to legal liability.<\/p>\n

The multi-million-dollar question is: Do the disparities you find arise from legitimate business needs that can’t reasonably be met in a more equitable manner?<\/strong><\/p>\n

Evaluating if there is a fairer means of accomplishing a legitimate business objective is a critical step in any fairness compliance program. To do it right, you have to pinpoint the specific business practices adversely impacting historically underserved groups and assess if there are alternative methods that achieve the same objectives with less bias.<\/p>\n

To find less discriminatory variants of your business processes, you may need advanced mathematical methods. For example, de-biasing and fairness optimization methods can help identify ways of adjusting your decisioning criteria, resulting in better outcomes for protected class applicants while staying within your risk tolerance. Experts can guide you through this process and ensure thorough and accurate results.<\/p>\n

6. Share Relevant Information With Your Partners<\/h2>\n

No one likes to share potentially negative information about their company.<\/p>\n

Still, in the multi-player BaaS ecosystem with fragmented responsibilities and siloed data, BaaS ecosystem participants need visibility into program-level fairness risks from the loans they facilitate. And if there are disparities, BaaS players need an understanding of what\u2019s driving them\u2014and whether there are less discriminatory alternatives to the disparity-driving practice.<\/p>\n

The business and legal risks to the BaaS ecosystem of individual participants withholding or minimizing the severity of compliance information outweigh the potential risks of sharing that information.<\/p>\n

This collective action problem, while seemingly protecting individual firms in the short-term, paradoxically raises fair lending risks for the BaaS ecosystem overall <\/strong>since a lack of transparency undermines regulatory and consumer confidence in BaaS programs.<\/p>\n

If there are confidentiality concerns, a neutral third party can evaluate the program without disclosing any single firm\u2019s confidential information to the others.<\/p>\n

Conclusion<\/h2>\n

If these fairness practices sound daunting, here\u2019s the good news: fairness is good for business<\/strong>. Disparities often represent missed opportunities or mis-priced customers, while identifying and minimizing disparate outcomes can be a path to higher revenue and lower risk, especially in a world of tightened credit and heightened regulatory enforcement.<\/p>\n

Meanwhile, not taking your fairness obligations seriously can tarnish your reputation, cost you money in penalties and rob you of potential partnerships, employee retention, consumer goodwill and more<\/strong>. Plus, a weak or absent fairness program can be a red flag for investors or partners, signaling potential regulatory problems or difficulty maintaining your bank partnerships down the line.<\/p>\n

Bottom line: BaaS players who fail to meet their fairness obligations place themselves at serious risk.<\/p>\n

If you follow the steps above, you\u2019ll ensure you aren\u2019t one of them.<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Pop quiz: Which players in the Banking-as-a-Service (BaaS) ecosystem \u2014 sponsor banks, fintechs, lead generators and middleware providers \u2014 are fair game for today\u2019s regulatory crackdown on bias in lending? If you answered \u201call of the above,\u201d you\u2019d be right. Today, plenty of fintechs, lead generators, middleware providers and other players in the BaaS world think that, since they aren\u2019t formally lenders, they\u2019ll be spared scrutiny of any discriminatory outcomes in the loans they facilitate. Some also believe that the fairness and non-discrimination obligations of a lending program are managed well enough through their sponsor bank\u2019s compliance programs. As such,<\/p>\n","protected":false},"author":1,"featured_media":460,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[41],"tags":[],"class_list":["post-459","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-tech"],"yoast_head":"\nWho Has Fairness Obligations In The Banking-As-A-Service Ecosystem? | ConnectWithFund<\/title>\n<meta name=\"description\" content=\"Pop quiz: Which players in the Banking-as-a-Service (BaaS) ecosystem \u2014 sponsor banks, fintechs, lead generators and middleware providers \u2014 are fair game\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/connectwithfund.com\/?p=459\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Who Has Fairness Obligations In The Banking-As-A-Service Ecosystem? 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