What are marginal effects?
In credit decision analyses, marginal effects are a measure of the difference in denial probabilities. For example, suppose the denial probability of a Hispanic applicant was determined to be 66%, but if that same applicant was White, and his/her denial probability was found to be 50%, the marginal effect for the Hispanic applicant would be 16% (66% – 50% = 16%). This result means the Hispanic applicant is 16% more likely to be denied. In summary, marginal effects as used in underwriting fair lending analyses express the absolute change in the denial probability associated with a prohibited basis group applicant versus the denial probability of an applicant who is not a member of a prohibited basis group.
They can be used on all credit products, including mortgages, consumer loans, home equity lines/loans, auto loans and credit cards.
How are they used?
Marginal effects allow the calculation of differences in denial rates by:
- Prohibited basis groups
- Branch/Bank Region
What are their benefits?
- CFPB uses denial rates as a measure of fair lending risk in addition to odds ratios in their analyses
- Reduces fair lending risk.
- Permits comparison of fair lending risks across prohibited basis groups, applicants, geographies, products and branches as well as bank regions.
- Allows sensitivity analyses of changes in underwriting guidelines, potential bank acquisitions