Color and Credit: Race, Regulation, and the Quality of Financial Services
43 Pages Posted: 24 Mar 2017 Last revised: 1 Nov 2017
Date Written: October 31, 2017
The incidence of mis-selling, fraud, and poor customer service by retail banks is significantly higher in markets with lower income and educational attainment. Further, areas with a higher share of minority population experience significantly worse outcomes even after controlling for factors such as income, education, and house price changes. Regulations aimed at improving access to credit to such areas are partly responsible for these findings. 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 poor and minority customers.
Keywords: discrimination, product quality, financial sophistication, consumer protection, regulation
JEL Classification: G21, G28, L13, L14
Suggested Citation: Suggested Citation