Consumer Lending Discrimination in the FinTech Era

50 Pages Posted: 6 Nov 2017 Last revised: 8 Dec 2017

Robert P. Bartlett

University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy

Adair Morse

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER)

Richard Stanton

University of California, Berkeley - Haas School of Business

Nancy Wallace

University of California, Berkeley - Real Estate Group

Date Written: December 7, 2017

Abstract

Lending discrimination can stem from loan officer facial biases or algorithmic scoring, especially with big-data use in FinTech. Using never-before-linked mortgage data covering loan-level ethnicity, scoring variables, contract terms, and lender identifiers, we implement a treatment-based Oaxaca-Blinder discrimination estimation, based on the unique default-risk setting of the GSEs. We find that African-American and Hispanic borrowers have a 5% higher loan rejection rate, especially among low-credit-score applicants. Consistent with facial biases, rejection-rate differences are less pronounced for FinTech lenders, for whom the minority rejection rates are 1% lower. Ethnic-minority borrowers pay a 0.08% higher interest rate for purchase mortgages and a 0.03% higher rate for refinance mortgages, which translates into almost half a billion dollars per year in extra interest payments. FinTech lenders charge only a 0.01% differential for refi loans to African-American and Hispanic borrowers. These latter results are consistent with profit-taking opportunities in weaker competitive environments.

Keywords: Discrimination, FinTech, Mortgages, Credit Scoring, Algorithmic Underwriting, Big Data Lending, Platform Loans, Disparate Impact

JEL Classification: G21, G28, G23, J14, K22, K23, R30

Suggested Citation

Bartlett, Robert P. and Morse, Adair and Stanton, Richard H. and Wallace, Nancy E., Consumer Lending Discrimination in the FinTech Era (December 7, 2017). UC Berkeley Public Law Research Paper. Available at SSRN: https://ssrn.com/abstract=3063448 or http://dx.doi.org/10.2139/ssrn.3063448

Robert P. Bartlett

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States
510-642-6646 (Phone)

University of California, Berkeley - Berkeley Center for Law, Business and the Economy

UC Berkeley School of Law
Berkeley, CA 94720

Adair Morse (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Richard H. Stanton

University of California, Berkeley - Haas School of Business ( email )

Haas School of Business
545 Student Services Building #1900
Berkeley, CA 94720-1900
United States
(510) 642-7382 (Phone)
(510) 643-1412 (Fax)

Nancy E. Wallace

University of California, Berkeley - Real Estate Group ( email )

Berkeley, CA 94720-1900
United States

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