4 December 2019

Recent research from the University of Edinburgh Business School has revealed that including gender information in credit scoring increases the proportion of women accepted for consumer credit without altering the predictive accuracy of these models. Therefore, women can benefit from gender being taken into consideration in automated decision-making processes, increasing their chances of being accepted for credit.
Equity Law Article: Male/female sign

Currently, using gender in decision making is prohibited by law in all major developed countries, with the EU's European Equal Treatment in Goods and Services Directive also following this principle. Equal treatment is generally understood as not using certain protected characteristics, including gender. However, the study found that by not considering gender as a variable, the outcome of credit decisions is not equal for men and women, and has a negative effect on women.

The research analysed a sample of 79,386 customers who were issued a car loan from a major European bank between 2003 and 2009, and built four different models following a standard credit scoring methodology. Using these models, researchers found that gender is a statistically significant variable, yet its removal does not affect the predictive power of the models. This means that there is no effect on lenders as they can maintain similar levels of bad debt for a given acceptance level irrespective of whether gender is used or not.

However, when including gender in one of the models, the effects for consumers changed. Female loan applicants, having lower default rates in the past, benefitted from a model which included gender, giving them extra points for being good risks and as such increasing their chances of being accepted for credit. On the other hand, when applying a unisex model (without gender), the chances of being accepted for credit decreased for women but rose for men—although, in general, women had lower rejection rates than men. This proved that following the principle of equal treatment by omitting gender from the modes, as current regulation implies, didn't lead to equality in the outcome.

Dr Galina Andreeva, Senior Lecturer in Management Science, said:

"What we set out to explore with our research were the consequences that legal restrictions on information, such as gender, can have in situations of automated decision making, for example when applying for a loan. Our findings highlight the inconsistencies of the existing regulations as they don't ensure equality of outcome for consumers. From the data that we analysed we were able to prove that women can benefit from gender being included in credit scoring models as this improves chances for them to be granted credit.

"Nevertheless, we would caution against extrapolating our findings to all protected groups and all credit products. It is possible that in other credit portfolios protected characteristics show different patterns. Our research is an illustration to show that equal treatment does not automatically translate into equal outcome. It also demonstrates that this happens because of correlation between gender and other predictors that remain in the models.

"We hope that our study will inspire the development of better and more effective regulations for automated decisions and solutions for both consumers and lenders to make sure that everyone has equal and fair opportunities when applying for credit, no matter their gender or background."

Galina Andreeva

Galina Andreeva is a Senior Lecturer in Management Science.

'The Law of Equal Opportunities or Unintended Consequences?: The Effect of Unisex Risk Assessment in Consumer Credit' was published in the Journal of the Royal Statistical Society.

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