Economists find discriminatory lending practices in mortgage industry

May 27, 2016

This post is adapted with permission from the original version by Christopher Stolarski at Marquette University.

A recently published article in the Journal of Urban Economics coauthored by Andrew Hanson (Marquette University), Zack Hawley (Texas Christian University, and the Center for Urban Studies), Hal Martin (Georgia State University), and Bo Liu (Georgia State University) finds that African-Americans face discrimination when seeking information about home loans from mortgage loan originators at early stages of the application process.

According to the authors, African-Americans are more likely than white Americans to not receive replies from mortgage loan originators. When they do receive replies, the responses are shorter, come later, and are less friendly.

The study points out that allegations of discriminatory lending practices during the 2004-08 housing boom resulted in the two large cash settlements between mortgage lenders and the Department of Justice — $335 million from Bank of America’s Countrywide group and $175 million from Wells Fargo. Further, another recent settlement between Wells Fargo and the Department of Justice in the amount of $1.2 billion may be the largest in history for mortgage mismanagement. The practices that resulted in these payments include steering equally qualified minority applicants into higher interest (sub-prime) loans, charging higher fees to minority applicants, and improperly classifying FHA loans.

Hawley and his collaborators used a correspondence field experiment to test for racial discrimination by mortgage loan originators. This method uses the names of the potential applicants to identify race in a paired email correspondence with originators to identify discriminatory outcomes.  The study uses names that are highly likely to be associated with either African-Americans or white Americans to see if their inquiries were treated differently by lenders.

After analyzing the data from more than 10,000 emails, the research team found net discrimination by 1.8 percent of lenders through non-response. The study also showed that lenders offer more details about loans and are more likely to send follow-up correspondence to whites.

Looking just at the response rates of mortgage loan originators, the effect of being African-American is equivalent to the effect of having a credit score that is 71 points lower.