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

See all articles by James B. Kau

James B. Kau

University of Georgia - Department of Insurance, Legal Studies, Real Estate

Lu Fang

Longwood University

Henry J. Munneke

University of Georgia - Department of Insurance, Legal Studies, Real Estate

Multiple version iconThere are 2 versions of this paper

Date Written: 2018

Abstract

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

Kau, James B. and Fang, Lu and Munneke, Henry J., An Unintended Consequence of Mortgage Financing Regulation - A Racial Disparity (2018). Journal of Real Estate Finance and Economics, 2018, Available at SSRN: https://ssrn.com/abstract=3533397

James B. Kau (Contact Author)

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States
706-542-9110 (Phone)
706-542-4295 (Fax)

Lu Fang

Longwood University ( email )

Farmville, VA
United States

Henry J. Munneke

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States
(706) 542-0496 (Phone)
(706) 542-4295 (Fax)

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