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Racial dispersion in consumer credit interest rates

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Author Info
Wendy Edelberg
Abstract

Most of the literature exploring racial disparities in consumer credit markets focuses on the issue of access to loans. But the disparate terms on which loans are issued are equally revealing. In this paper, I examine disparities in a variety of consumer loan interest rates using a reduced-form framework. I find that interest rates on loans issued before the 1995 show a statistically significant degree of unexplained racial heterogeneity even after controlling for the financial costs of issuing debt. However, racial dispersion in rates falls off for loans originated after 1995. ; The unexplainable racial disparity in consumer loan rates issued before 1995 implies that in this earlier period minorities faced unaccountably higher interest-rate premiums on the order of--in two examples--20 basis points for first mortgages and 80 basis points for automobile loans. Overall, evidence of unexplainable racial dispersion in interest rates is more robust among homeowners than renters.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2007-28.

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Date of creation: 2007
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Handle: RePEc:fip:fedgfe:2007-28

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Keywords: Discrimination in consumer credit;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. James A. Berkovec & Glenn B. Canner & Stuart A. Gabriel & Timothy H. Hannan, 1998. "Discrimination, Competition, And Loan Performance In Fha Mortgage Lending," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 241-250, May. [Downloadable!] (restricted)
  2. Scott Fay & Erik Hurst & Michelle J. White, 2002. "The Household Bankruptcy Decision," American Economic Review, American Economic Association, vol. 92(3), pages 706-718, June. [Downloadable!]
  3. Tullio Jappelli & Jörn-Steffen Pischke & Nicholas S. Souleles, 1998. "Testing For Liquidity Constraints In Euler Equations With Complementary Data Sources," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 251-262, May. [Downloadable!] (restricted)
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  4. Ausubel, Lawrence M, 1991. "The Failure of Competition in the Credit Card Market," American Economic Review, American Economic Association, vol. 81(1), pages 50-81, March.
  5. Song Han, 2002. "On the economics of discrimination in credit markets," Finance and Economics Discussion Series 2002-2, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  6. Geoffrey M. Tootell, 1996. "Redlining in Boston: do mortgage lenders discriminate against neighborhoods?," Working Papers 96-6, Federal Reserve Bank of Boston. [Downloadable!]
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  7. Ken Cavalluzzo & Linda Cavalluzzo & John Wolken, 1999. "Competition, small business financing, and discrimination: evidence from a new survey," Finance and Economics Discussion Series 1999-25, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  8. Stephen L. Ross & John Yinger, 2002. "The Color of Credit: Mortgage Discrimination, Research Methodology, and Fair-Lending Enforcement," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262182289.
  9. Crawford, Gordon W & Rosenblatt, Eric, 1999. "Differences in the Cost of Mortgage Credit Implications for Discrimination," The Journal of Real Estate Finance and Economics, Springer, vol. 19(2), pages 147-59, September. [Downloadable!] (restricted)
  10. Ayres, Ian & Siegelman, Peter, 1995. "Race and Gender Discrimination in Bargaining for a New Car," American Economic Review, American Economic Association, vol. 85(3), pages 304-21, June. [Downloadable!] (restricted)
  11. Martin, Robert E & Hill, R Carter, 2000. "Loan Performance and Race," Economic Inquiry, Oxford University Press, vol. 38(1), pages 136-50, January.
  12. Duca John V. & Rosenthal Stuart S., 1993. "Borrowing Constraints, Household Debt, and Racial Discrimination in Loan Markets," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 77-103, October. [Downloadable!] (restricted)
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  13. Goldberg, Pinelopi Koujianou, 1996. "Dealer Price Discrimination in New Car Purchases: Evidence from the Consumer Expenditure Survey," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 622-54, June. [Downloadable!] (restricted)
  14. Marsha Courchane & David Nickerson, 1997. "Discrimination Resulting from Overage Practices," Journal of Financial Services Research, Springer, vol. 11(1), pages 133-151, February. [Downloadable!] (restricted)
  15. Ian Domowitz & Robert L. Sartain, 1999. "Determinants of the Consumer Bankruptcy Decision," Journal of Finance, American Finance Association, vol. 54(1), pages 403-420, 02. [Downloadable!] (restricted)
  16. repec:fth:pennfi:69 is not listed on IDEAS
  17. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints And Interest Rates Matter For Consumer Behavior? Evidence From Credit Card Data," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 149-185, February. [Downloadable!] (restricted)
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  18. Ken S. Cavalluzzo, 2002. "Competition, Small Business Financing, and Discrimination: Evidence from a New Survey," Journal of Business, University of Chicago Press, vol. 75(4), pages 641-680, October. [Downloadable!]
  19. Simon Firestone & Robert Van Order & Peter Zorn, 2007. "The Performance of Low-Income and Minority Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(4), pages 479-504, December. [Downloadable!] (restricted)
  20. Edelberg, Wendy, 2006. "Risk-based pricing of interest rates for consumer loans," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 2283-2298, November. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ethan Cohen-Cole, 2008. "Credit card redlining," Quantitative Analysis Unit Working Paper QAU08-1, Federal Reserve Bank of Boston. [Downloadable!]
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