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Consumer-Lending Discrimination in the FinTech Era

Journal: Journal of Financial Economics

Date: 20220101

Author: Bartlett, Robert; Morse, Adair; Stanton, Richard; Wallace, Nancy

Abstract:
U.S. fair-lending law prohibits lenders from making credit determinations that disparately affect minority borrowers if those determinations are based on characteristics unrelated to creditworthiness. Using an identification under this rule, we show risk-equivalent Latinx/Black borrowers pay significantly higher interest rates on GSE-securitized and FHA-insured loans, particularly in high-minority-share neighborhoods. We estimate these rate differences cost minority borrowers over $450 million yearly. FinTech lenders' rate disparities were similar to those of non-Fintech lenders for GSE mortgages, but lower for FHA mortgages issued in 2009-2015 and for FHA refi mortgages issued in 2018-2019.

Link: Google Scholar

Key Findings

Higher Interest Rates for Minority Borrowers

Latinx and Black borrowers pay 4.7-4.9 basis points more for GSE and FHA home purchase loans and 1.5-1.6 basis points more for refinance loans compared to non-minority borrowers.

Geographic Disparities

Minority borrowers in high-minority-share census tracts pay significantly higher rates - up to 13.8 basis points more for GSE loans and 16.2 basis points more for FHA loans compared to non-minority borrowers in low-minority areas.

FinTech Impact

FinTech lenders show similar rate disparities as traditional lenders for GSE loans, but 27% lower disparities for FHA purchase loans and 37% lower for FHA refinance loans.

Interest Rate Differentials by Loan Type

  • Purchase loans show larger rate differentials than refinance loans
  • FHA and GSE loans exhibit similar patterns of disparities
  • Data from Table 3 showing baseline regression results

Geographic Impact on Interest Rates

  • High-minority areas show amplified rate disparities
  • FHA purchase loans exhibit the largest geographic disparity
  • Based on census tract analysis from Tables 5 and 6

FinTech vs Traditional Lender Rate Differentials

  • FinTech lenders show lower disparities for FHA loans
  • GSE loan disparities remain similar across lender types
  • Data sourced from Table 4 comparing FinTech and non-FinTech lenders

Contribution and Implications

  • First comprehensive study of mortgage discrimination in the post-crisis era using both traditional and FinTech lenders
  • Demonstrates persistence of lending disparities despite technological advances in loan origination
  • Highlights the role of geography in amplifying lending disparities
  • Estimates minority borrowers pay over $450 million extra in interest annually

Data Sources

  • Interest Rate Differentials Chart: Constructed using regression coefficients from Table 3
  • Geographic Impact Chart: Combined data from Tables 5 and 6 showing census tract effects
  • FinTech Comparison Chart: Based on coefficients from Table 4 comparing lender types