Racial bias has played “a limited role” in recent years in generating disparities seen in mortgage lending denials, according to a recent study published by the Federal Reserve. The researchers used confidential supervisory data collected under the Home Mortgage Disclosure Act to estimate the extent to which racial and ethnic discrimination by mortgage lenders continues to generate disparities in denial rates. They concluded that bias still accounts for some of that gap, but that “racially biased credit decisions appear less common than has been suggested by previous research.” However, they cautioned the paper’s conclusions must be considered “in the context of a large literature that has found evidence of racial bias in other markets and settings.”
The researchers acknowledged that as a self-reporting mechanism, HDMA reports may not reflect reality “as a lender engaged in illegal discrimination would be unlikely to explicitly admit this.” Still, they said the reports allowed them to better understand how lenders justify excess denials. They then compared the data with other sources of information, such as the denial rates in different communities. They also examined denial rates among fintech lenders, saying that by automating more of the application process, fintech firms have the potential to reduce racial discrimination. Excess denials were higher at fintech lenders than at traditional lenders, “the opposite result we would expect if excess denials reflect racially biased human judgment.”
Rather than differential treatment, the researchers concluded that group differences in risk characteristics drive most of the disparities in credit access. Black and Hispanic applicants tend to be more leveraged and have much lower credit scores, they said. As a result, both are less likely to receive algorithmic approval recommendations from government-automated underwriting systems than white applicants.
The researchers noted there are potential gaps in the data used, such as lenders unfairly discouraging people from underrepresented groups from applying for mortgages. They also said that the HDMA reports used were explicitly created as a tool to fight against mortgage discrimination. “The finding that this effort has been largely successful does not mean that individual racial prejudice has been eliminated, or that overt discrimination would not rear its head if fair lending enforcement were to be relaxed,” they said.