How Much Does Racial Bias Affect Mortgage Lending? Evidence from Human and Algorithmic Credit Decisions

27 Pages Posted: 19 Jul 2021

See all articles by Neil Bhutta

Neil Bhutta

Board of Governors of the Federal Reserve System

Aurel Hizmo

Board of Governors of the Federal Reserve System

Daniel Ringo

Board of Governors of the Federal Reserve System

Date Written: July 15, 2021

Abstract

We compare mortgage lenders’ credit decisions to algorithmic recommendations – on the same set of loan applications – from widely used Automated Underwriting Systems (AUS) to assess discrimination. In 2018-19, lenders were more likely to deny minority applicants than non-Hispanic white applicants. This paper is the first to document that “color-blind” AUS also recommend higher denial rates for minorities. Controlling for AUS recommendation, credit score, debt-to-income ratio, and loan-to-value ratio explains most of the racial and ethnic gaps in denials, although not the entirety. We show that lenders with the largest unexplained racial and ethnic denial gaps tend to also have the largest unexplained denials for non-Hispanic white applicants, suggesting that tight standards on unobservables might explain part of the remaining gaps. Additionally, our analysis of lenders’ reported denial reasons suggests that the remaining gaps could partially reflect differences by race and ethnicity in the successful completion of the final stages of loan approval (e.g. documentation of income). Overall, this evidence suggests a much more limited role for disparate treatment by lenders in the approval process than has been suggested in recent research.

Keywords: Discrimination, mortgage lending, automated underwriting, credit score, fair lending

JEL Classification: G21, G28, R30, R51

Suggested Citation

Bhutta, Neil and Hizmo, Aurel and Ringo, Daniel, How Much Does Racial Bias Affect Mortgage Lending? Evidence from Human and Algorithmic Credit Decisions (July 15, 2021). Available at SSRN: https://ssrn.com/abstract=3887663 or http://dx.doi.org/10.2139/ssrn.3887663

Neil Bhutta (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Aurel Hizmo

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Daniel Ringo

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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