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How Much Does Racial Bias Affect Mortgage Lending? Evidence from Human and Algorithmic Credit Decisions

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Abstract

We assess racial discrimination in mortgage approvals using new data on mortgage applications. Minority applicants tend to have significantly lower credit scores, higher leverage, and are less likely than white applicants to receive algorithmic approval from race-blind government automated underwriting systems (AUS). Observable applicant- risk factors explain most of the racial disparities in lender denials. Further, we exploit the AUS data to show there are risk factors we do not directly observe, and our analysis indicates that these factors explain at least some of the residual 1-2 percentage point denial gaps. Overall, we find that differential treatment has played a limited role in generating denial disparities in recent years.

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  • Neil Bhutta & Aurel Hizmo & Daniel R. Ringo, 2022. "How Much Does Racial Bias Affect Mortgage Lending? Evidence from Human and Algorithmic Credit Decisions," Finance and Economics Discussion Series 2022-067, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2022-67
    DOI: 10.17016/FEDS.2022.067
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    Cited by:

    1. Joshua S. Graff Zivin & Gregor Singer, 2022. "Disparities in Pollution Capitalization Rates: The Role of Direct and Systemic Discrimination," NBER Working Papers 30814, National Bureau of Economic Research, Inc.
    2. Nicholas Tenev, 2024. "De-Biasing Models of Biased Decisions: A Comparison of Methods Using Mortgage Application Data," Papers 2405.00910, arXiv.org.
    3. Xudong An & Sadok El Ghoul & Omrane Guedhami & Ross Levine & Raluca Roman, 2023. "Social Capital and Mortgages," Working Papers 23-23, Federal Reserve Bank of Philadelphia.

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    More about this item

    Keywords

    Discrimination; Fair lending; Automated underwriting; Credit score; Mortgage lending;
    All these keywords.

    JEL classification:

    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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