Reducing Racial Disparities in Consumer Credit: the Role of Minority Loan Officers in the Era of Algorithmic Underwriting

59 Pages Posted: 1 Mar 2022 Last revised: 6 Feb 2023

See all articles by Erica Xuewei Jiang

Erica Xuewei Jiang

University of Southern California

Yeonjoon Lee

The Federal Reserve Bank of Richmond

Will Shuo Liu

City University of Hong Kong - Department of Economics and Finance

Date Written: November 15, 2021

Abstract

Using a novel data set that links mortgage loan officer registration records to individual loan applications in the U.S., we find that minority loan officers expand credit access for minority borrowers. This impact is non-trivial even with the widespread adoption of automated underwriting systems (AUS). Minority loan officers are more likely to override negative AUS recommendations received by minority applicants. Even for minority applicants approved by AUS, minority loan officers still make a difference in the ultimate approval and origination decision. Analyzing borrower heterogeneity and ex-post default, we find evidence consistent with minority loan officers being crucial for collecting and verifying relevant credit information for minority applicants with noisy hard information but good intrinsic credit quality. These findings support policies aiming to mitigate the under-representation of minority loan officers, which we show is positively associated with the racial mortgage rejection gap across regions and lending institutions.

Keywords: Mortgage, Loan Officer, Racial Disparity, Automated Underwriting Systems

Suggested Citation

Jiang, Erica Xuewei and Lee, Yeonjoon and Liu, Will Shuo, Reducing Racial Disparities in Consumer Credit: the Role of Minority Loan Officers in the Era of Algorithmic Underwriting (November 15, 2021). USC Marshall School of Business Research Paper Sponsored by iORB, Available at SSRN: https://ssrn.com/abstract=4035764 or http://dx.doi.org/10.2139/ssrn.4035764

Erica Xuewei Jiang (Contact Author)

University of Southern California ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States

Yeonjoon Lee

The Federal Reserve Bank of Richmond ( email )

United States

Will Shuo Liu

City University of Hong Kong - Department of Economics and Finance ( email )

9-206 Lau Ming Wai Academic Bldg
83 Tat Chee Ave, Kowloon Tong
Kowloon, 00000
Hong Kong

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