Fair Lending and Alternative Collateral: The Questions Nobody Wants to Answer

Alternative asset lending presents a fair lending challenge that most lenders would rather avoid discussing: the very assets that make these programs attractive are unevenly distributed across the population, which creates regulatory risk from day one.

The Distribution Problem

Alternative assets are held disproportionately by certain demographic groups. Private company equity concentrates among technology and high-growth company employees. Private fund interests require accredited investor status, which means high net worth by definition. Cryptocurrency has historically skewed younger and male, though that's evolving.

Consider what happens when a credit union launches an alternative asset lending program. The members who can access the program tend to be higher-income, more educated, more likely to work in tech, and concentrated in certain geographic regions, and those characteristics correlate with protected classes under fair lending law.

None of that makes the program inherently discriminatory, but the correlation creates the exact pattern regulators look for when evaluating disparate impact.

What Regulators Actually Care About

Fair lending analysis centers on two concepts: disparate treatment and disparate impact.

Disparate treatment means intentionally treating applicants differently based on protected characteristics, and the analysis is straightforward: if you're making different lending decisions because of race, gender, or other protected status, you have a problem.

Disparate impact is subtler because it means facially neutral policies that disproportionately affect protected groups without sufficient business justification. A program that accepts only private company equity as collateral is neutral on its face, but if that eligibility criterion disproportionately excludes protected groups, you need a legitimate business reason for the limitation.

The key phrase is "sufficient business justification." You can accept cryptocurrency while declining jewelry. You can require minimum loan amounts. You can limit geographic scope. But each limitation should have a documented reason beyond "we didn't feel like building that capability."

Where the Risk Actually Lives

Asset class selection is the most obvious exposure because every asset class you exclude needs justification. Why accept Bitcoin but exclude Dogecoin? Why accept publicly traded stock but exclude closely held business interests? These questions have legitimate answers, but you need to have thought about them before an examiner asks.

Minimum loan amounts matter more than most lenders realize. A $500,000 minimum might make sense operationally, but if that threshold excludes borrowers who correlate with protected characteristics, you need to document why the minimum is set where it is. Could you serve smaller loans with a different cost structure? Have you analyzed the feasibility?

Valuation methodology can create hidden bias because if your haircuts vary significantly by asset class, and those asset classes correlate with demographic patterns, you've created a disparate impact pathway. The haircut differences need to be justified by actual risk differences rather than tradition or convenience.

Marketing and outreach are often overlooked. If your program marketing reaches only tech company HR departments, you've limited your applicant pool in ways that may have demographic implications. Fair lending analysis includes how you source applications, not just how you process them.

The Monitoring You Actually Need

Fair lending monitoring for alternative asset programs requires data you may not currently collect.

You need application outcome data by demographic, and while HMDA doesn't typically cover pledged-asset lending, that exemption doesn't remove your monitoring obligations. Build an internal framework that applies similar principles.

You need pricing data by demographic because if similarly situated borrowers are getting different rates, you need to understand why.

You need asset class acceptance data showing which asset types members are pledging and whether that pattern correlates with demographics.

And you need to actually review this data periodically, quarterly at minimum rather than once at program launch.

What To Do About It

The good news is that fair lending risk is manageable with forethought. The institutions that get in trouble are the ones that designed programs without considering these issues and then discovered the problems during examination.

Start by accepting diverse asset classes where operationally feasible because broader acceptance creates more entry points and reduces the correlation between eligibility and demographics. Avoid accepting assets you cannot properly value or secure, but avoid artificially limiting scope either.

Document your business justifications from day one. When you set a minimum loan amount, write down why. When you exclude an asset class, write down why. These memos will matter when an examiner asks.

Build monitoring into operations from the start because retrofitting fair lending monitoring onto an existing program is much harder than designing it in initially.

Be honest about what you find. If monitoring reveals unexplained disparities, investigate. If investigation reveals a problem, fix it. Document the process. Examiners expect responsive risk management rather than perfection.

The Bigger Picture

Alternative asset lending genuinely expands access to credit. Jane with $2M in startup equity deserves the same lending consideration as her colleague with $2M in index funds, and the infrastructure gap that prevents traditional banks from seeing modern wealth is a real problem worth solving.

But expanding access doesn't exempt you from fair lending, and what matters is whether similarly situated applicants within your program are treated consistently.

Build the program right from the start. The regulatory investment pays dividends in examination outcomes, reduced litigation risk, and better business practice. Fair lending compliance and alternative asset lending work together: get the compliance architecture right from the start, and the program scales without regulatory friction.

For fair lending guidance specific to your program, consult compliance counsel. This article provides general information and does not constitute legal advice.