The Role of Human Underwriting in the Big Data Era

78 Pages Posted: 10 Nov 2023

See all articles by Janet Gao

Janet Gao

McDonough School of Business

Hanyi (Livia) Yi

Boston College - Carroll School of Management

David Hao Zhang

Rice University - Jesse H. Jones Graduate School of Business

Date Written: October 14, 2023

Abstract

With the fast advancement of lending technology and data availability, what is the role of human underwriting in augmentation of algorithmic underwriting systems? We study the effects of an FHA policy that relaxed the requirement for human underwriting for low-credit-score, high-leverage borrowers. Estimating the bunching of loans around the DTI threshold, we find that the policy change leads to a significant credit expansion to affected borrowers, represented by higher mortgage take-up and increased household leverage. Such effects are more pronounced among non-Hispanic White borrowers and higher-income borrowers. Consequently, low-credit-score households are more likely to move to better school districts. Despite the credit expansion, we find little change in default risks or interest rates among the affected group. A structural approach helps us quantify the welfare implications of the policy change and isolate the credit supply channel. Overall, our results suggest that the human underwriting mandate restricted credit supply without substantially reducing risks. However, a heavier reliance on machine underwriting can generate disparate impact across racial groups and along the income distribution.

Keywords: Human Underwriting, Household Leverage, Racial Inequality in Mortgage Markets, Mobility

JEL Classification: G18, G21, G51, O33

Suggested Citation

Gao, Janet and Yi, Hanyi and Zhang, David Hao, The Role of Human Underwriting in the Big Data Era (October 14, 2023). Available at SSRN: https://ssrn.com/abstract=4602411 or http://dx.doi.org/10.2139/ssrn.4602411

Janet Gao (Contact Author)

McDonough School of Business ( email )

Washington, DC 20057
United States

Hanyi Yi

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

David Hao Zhang

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
51
Abstract Views
222
Rank
652,741
PlumX Metrics