April 28, 2020
Fintech Lenders Discriminate Less
Do online financial companies give minorities a fair shake?
Researchers and consumers have found some early evidence that this fast-growing segment of the financial industry – Fintech – may be mitigating, though not eliminating, the legacy of discrimination that has been widely documented in the brick-and-mortar mortgage industry.
First came bank redlining, a conceptual line lenders drew around black neighborhoods. In a famous study, banks rejected black loan applicants more often than white borrowers with the same incomes. Lenders have also been found to discriminate by charging black borrowers higher interest rates for their mortgages.
Discrimination took a different form when subprime lending invaded the mortgage market prior to the 2008 financial collapse. Commissions to subprime loan brokers gave them an incentive to make as many loans as possible, and the high-interest-rate mortgages more often found their way into minority communities, even to the high-income people who could have qualified for regular mortgages.
But Fintech’s algorithms have improved the dynamics of lending for minority borrowers. The danger now is that the progress they have seen might be reversed as the pandemic batters the mortgage industry and loans dry up.
A November study by the Federal Reserve Bank of Philadelphia found that Fintech lenders have made more loans in under-served minority and rural neighborhoods. The theory behind this is that old-style bankers discriminated against minorities because they met loan applicants face-to-face. Fintech’s computer algorithms, the argument goes, are blind to race, and loan approvals are more anchored in a borrower’s creditworthiness.
Economists at the University of California at Berkeley found more mixed but still promising results. FinTech lenders “do not discriminate at all in the decision to reject or accept a minority loan application,” the researchers concluded from an analysis of lending patterns.
But the other common form of discrimination against minority borrowers does exist: they are charged interest rates that are about one-tenth of a percentage point more than the rates charged to white borrowers. These higher rates cost African-American and Hispanic borrowers an estimated $765 million in extra interest annually.
One explanation for the pricing disparity is that online lenders may be charging minority borrowers more – whether intentionally or not – based on the Big Data they use in their proprietary algorithms, perhaps through the neighborhood where the house is being purchased.
But even the interest-rate disparity between white and minority homebuyers is shrinking and “discrimination in loan pricing is declining for all lenders,” the researchers found.
The reason? Competition. It’s easier for consumers to shop around and get several mortgage quotes when asking for mortgage quotes online.
But the lending industry is facing big disruptions now that the coronavirus has slowed the economy and liquidity is drying up. The changes are certain to affect minority borrowers. The question is how.
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