An Unintended Consequence of Mortgage Financing Regulation - A Racial Disparity
Journal of Real Estate Finance and Economics, 2018
Posted: 6 Mar 2020 Last revised: 27 May 2020
Date Written: 2018
This study investigates whether mortgage financing regulation unintentionally leads to minorities paying a higher loan contract rate under a risk-based pricing system. We provide evidence that minority borrowers prepay less frequently than comparable non-minority borrowers and thus have lower termination risk. Racially neutral lending policies prohibit the lender from considering this reduced termination risk, resulting in a disparate impact from the overstatement of a minority borrower's termination risk. While we find little evidence of a rate differential among borrowers under the current regulatory structure, results show minorities pay a higher rate when the variation in termination risk is recognized.
Keywords: Mortgage discrimination, Prepayment, Default and regulation
JEL Classification: G21, G28, J15, R20
Suggested Citation: Suggested Citation