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Consumer-Lending Discrimination in the FinTech Era

Author

Listed:
  • Robert Bartlett
  • Adair Morse
  • Richard Stanton
  • Nancy Wallace

Abstract

Discrimination in lending can occur either in face-to-face decisions or in algorithmic scoring. We provide a workable interpretation of the courts’ legitimate-business-necessity defense of statistical discrimination. We then estimate the extent of racial/ethnic discrimination in the largest consumer-lending market using an identification afforded by the pricing of mortgage credit risk by Fannie Mae and Freddie Mac. We find that lenders charge Latinx/African-American borrowers 7.9 and 3.6 basis points more for purchase and refinance mortgages respectively, costing them $765M in aggregate per year in extra interest. FinTech algorithms also discriminate, but 40% less than face-to-face lenders. These results are consistent with both FinTech and non-FinTech lenders extracting monopoly rents in weaker competitive environments or profiling borrowers on low-shopping behavior. Such strategic pricing is not illegal per se, but under the law, it cannot result in discrimination. The lower levels of price discrimination by algorithms suggests that removing face-to-face interactions can reduce discrimination. Further silver linings emerge in the FinTech era: (1) Discrimination is declining; algorithmic lending may have increased competition or encouraged more shopping with the ease of platform applications. (2) We find that 0.74-1.3 million minority applications were rejected between 2009 and 2015 due to discrimination; however, FinTechs do not discriminate in loan approval.

Suggested Citation

  • Robert Bartlett & Adair Morse & Richard Stanton & Nancy Wallace, 2019. "Consumer-Lending Discrimination in the FinTech Era," NBER Working Papers 25943, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25943
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    Cited by:

    1. Kristopher S. Gerardi & Paul S. Willen & David Hao Zhang, 2020. "Mortgage Prepayment, Race, and Monetary Policy," FRB Atlanta Working Paper 2020-22, Federal Reserve Bank of Atlanta.
    2. Lee, Kyungwon & Hakstian, Anne-Marie & Williams, Jerome D., 2021. "Creating a world where anyone can belong anywhere: Consumer equality in the sharing economy," Journal of Business Research, Elsevier, vol. 130(C), pages 221-231.
    3. Nicola Branzoli & Ilaria Supino, 2020. "FinTech credit: a critical review of empirical research," Questioni di Economia e Finanza (Occasional Papers) 549, Bank of Italy, Economic Research and International Relations Area.
    4. Brock, Michelle & de Haas, Ralph, 2020. "Discriminatory Lending: Evidence from Bankers in the Lab," CEPR Discussion Papers 14340, C.E.P.R. Discussion Papers.
    5. Adair Morse & Karen Pence, 2021. "Technological Innovation and Discrimination in Household Finance," Springer Books, in: Raghavendra Rau & Robert Wardrop & Luigi Zingales (ed.), The Palgrave Handbook of Technological Finance, pages 783-808, Springer.
    6. Jens Ludwig & Sendhil Mullainathan, 2021. "Fragile Algorithms and Fallible Decision-Makers: Lessons from the Justice System," Journal of Economic Perspectives, American Economic Association, vol. 35(4), pages 71-96, Fall.
    7. Jessica LaVoice & Domonkos F. Vamossy, 2019. "Racial Disparities in Debt Collection," Papers 1910.02570, arXiv.org.
    8. Bollaert, Helen & Lopez-de-Silanes, Florencio & Schwienbacher, Armin, 2021. "Fintech and access to finance," Journal of Corporate Finance, Elsevier, vol. 68(C).
    9. Christian E. Weller & Connor Maxwell & Danyelle Solomon, 2021. "Simulating How Large Policy Proposals Affect the Black-White Wealth Gap," Journal of Economics, Race, and Policy, Springer, vol. 4(3), pages 196-213, September.
    10. Bu, Di & Hanspal, Tobin & Liao, Yin & Liu, Yong, 2020. "Financial literacy and self-control in FinTech: Evidence from a field experiment on online consumer borrowing," SAFE Working Paper Series 273, Leibniz Institute for Financial Research SAFE.

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    More about this item

    JEL classification:

    • 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
    • J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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