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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

Background and Context

Research Focus

This study investigates discrimination in mortgage lending by examining interest rate differences between minority and non-minority borrowers for loans backed by government-sponsored enterprises (GSEs) and the Federal Housing Administration (FHA).

Methodology

The researchers analyzed over 5.7 million mortgage loans issued between 2009-2015 and 3.2 million loans from 2018-2019, comparing interest rates between Latinx/Black borrowers and non-minority borrowers while controlling for credit risk factors.

Data Sources

The study merged four major mortgage datasets: McDash loan-level data, ATTOM property data, Home Mortgage Disclosure Act (HMDA) data, and Equifax loan performance data to create a comprehensive analysis.

Higher Interest Rates Paid by Minority Borrowers (2009-2015)

  • Shows the additional interest rate paid by minority borrowers compared to non-minority borrowers
  • Purchase loans show larger disparities than refinance loans
  • Both GSE and FHA loans exhibit significant rate differences

Interest Rate Disparities by Census Tract Minority Share (2009-2015)

  • Shows how rate differences increase in areas with higher minority populations
  • Demonstrates geographical component of lending discrimination
  • Rate disparities are highest in census tracts with highest minority share

FinTech vs Traditional Lender Rate Disparities (2018-2019)

  • Compares discrimination levels between FinTech and traditional lenders
  • Shows FinTech lenders exhibit similar disparities for GSE loans
  • Demonstrates technology alone does not eliminate lending discrimination

Impact of Points and Loan Costs on Rate Disparities (2018-2019)

  • Shows rate disparities persist even after controlling for points and loan costs
  • Demonstrates discrimination cannot be explained by differences in up-front payments
  • Indicates systematic pricing differences affect minority borrowers

Estimated Annual Cost of Discrimination

$450+ Million
  • Represents the additional interest paid annually by minority borrowers due to rate disparities
  • Calculated using 2018-2019 rate differences and total GSE/FHA mortgage volumes
  • Demonstrates the substantial economic impact of lending discrimination

Contribution and Implications

  • Provides first comprehensive evidence of persistent mortgage discrimination in the post-financial crisis era
  • Shows algorithmic lending has not eliminated discrimination, suggesting need for additional regulatory oversight
  • Demonstrates importance of GSE/FHA role in standardizing credit risk assessment to reduce discrimination

Data Sources

  • Rate differentials from Table 3 (2009-2015 data) and Table 10 (2018-2019 data)
  • Census tract analysis based on figures reported in Section 5.4.1 and Table 5
  • FinTech comparison using data from Table 11
  • Points and costs analysis from Table 10 panels (a) and (c)
  • Annual cost estimate derived from methodology described in Section 8