Color and Credit: Race, Regulation, and the Quality of Financial Services
50 Pages Posted: 24 Mar 2017 Last revised: 7 Aug 2020
Date Written: August 6, 2020
The incidence of mis-selling, fraud, and poor customer service by retail banks is significantly higher in areas with higher proportions of poor and minority borrowers and in areas where government regulation promotes an increased quantity of lending. Specifically, low-to-moderate-income (LMI) areas targeted by the Community Reinvestment Act have significantly worse outcomes, and this effect is larger for LMI areas with a high-minority population share. The results highlight an unintended adverse consequence of such quantity-focused regulations on the quality of credit to lower-income and minority customers.
Keywords: discrimination, product quality, financial sophistication, consumer protection, regulation
JEL Classification: G21, G28, L13, L14
Suggested Citation: Suggested Citation