Home lending disparities costs minorities millions-new study

[zarahan]

excerpt
www.cbsnews.com/news/mortgage-discrimination-black-and-latino-paying-millions-more-in-interest-study-shows/

MONEYWATCH Disparity in home lending costs minorities millions, researchers find
BY KHRISTOPHER J. BROOKS

<<snip>>
A recent analysis of nearly 7 million 30-year mortgages by University of California at Berkeley researchers found that black and Latino applicants were charged higher interest — an average of nearly 0.08% — and heavier refinance fees when compared with white borrowers. That was in face-to-face transactions. When applying online or through an app, minorities still ended up paying more, though terms were slightly better than when borrowing in person.

The upshot: Long-standing discrimination faced by people of color in getting a home loan can be reproduced in software-based lending, technology that advocates say is supposed to prevent bias.

Latinos and African-Americans paid almost one tenth of a percentage point more for mortgages between 2008 and 2015, the study found — a disparity that sucked hundreds of millions of dollars from minority homeowners every year. For example, a black homeowner with a $429,000 mortgage would pay an average of $640 more over the life of the loan, said Nancy Wallace, one of the Berkeley researchers.

An amount that equates to an extra $20 a year may seem small for one household, but "It's still outrageous" to pay more because you're a different race, Wallace said. And it adds up: The higher mortgage costs amount to an additional $765 million a year for black and Latino borrowers.

People of color have faced decades of higher hurdles than whites when it comes to getting a home loan, with even creditworthy borrowers getting rejected at a higher rate or unfairly being charged higher interest rates.


The Berkeley study found that both face-to-face and online lenders rejected a total of 1.3 million creditworthy black and Latino applicants between 2008 and 2015.

Researchers said they believe the applicants "would have been accepted had the applicant not been in these minority groups." That's because when they used the income and credit scores of the rejected applications but deleted the race identifiers, the mortgage application was accepted.

Researchers said it's unclear how the price discrimination is happening, but described their study as "a small but growing literature on discrimination in lending." Exacerbating the problem is that black and Latino applicants aren't securing multiple offers from different lenders, which is costing them in the long run, Wallace said.

"The biggest takeaway for both the Latino and black communities is you should shop around for your mortgage," Wallace said. "You should not accept the first option."

Higher denial rates for blacks
In the home lending world, the Berkeley study presents rare documentation that racial bias in face-to-face lending also seems to be creeping into online platforms. A Lending Tree study released in October reported that African-Americans had the highest denial rates for mortgages in 2018 at 17.4%. Whites had the lowest at 7.9%. The study showed that African-Americans and Latinos have had the highest denial rates since 2004.


AI faces scrutiny
Still, platforms like Rocket Mortgage are powered by complex artificial intelligence algorithms and machine learning systems that one expert said are likely flawed from their outset.

Machine learning systems are developed when programmers load in large data sets to teach the system how to respond to new information. The system "identifies patterns within the data and uses those historical patterns to make predictions about future data," said Sarah Myers West, who studies artificial intelligence bias at New York University.

West said she can see how bias would happen in online home lending because those platforms were built from old mortgages that were already biased.


AI-powered algorithms received even more scrutiny this past week when allegations of gender bias arose in the Apple Card from Goldman Sachs. Apple co-founder Steve Wozniak and Basecamp chief technology officer David Heinmeier Hansson both reported their wives got a lower amount of credit offered when they applied online despite the women having a similar credit profile as their spouse .

"We turn to machine learning in the hopes that they'll be more objective, but really what they're doing is reflecting and amplifying historical patterns of discrimination and often in ways that are harder to see," West said.

Despite perhaps an inherited bias, Berkeley researchers still believe applying online or through an app has its advantages for blacks and Latinos. App-based approvals are 40% less likely to result in higher mortgage rates for borrowers of color, researchers said in their study, and those avenues do not reject a person's application based on race.


Graduates Of Historically Black Colleges May Be Paying More For Loans: Watchdog Group
February 5, 20205:09 AM ET
Heard on Morning Edition

Financial firms may be discriminating against people based on where they went to college, a watchdog group says. In particular, the group found that a lender named Upstart appears to be charging higher interest rates on student loans to graduates of historically black or predominantly Hispanic colleges.

A lot more people are getting loans these days from a new breed of lenders known as fintechs, or financial technology firms. And some of these lenders factor in where loan applicants went to college.


"It really raised some alarm flags," said Kat Welbeck, the civil rights counsel at the nonprofit Student Borrower Protection Center.
So her group decided to run a test. It chose a lender called Upstart, in part because it's a fairly prominent fintech that says it considers educational data. And the group was able to easily apply and get loan offers on its website.

The group applied for dozens of loans online — posing as a 24-year-old man. It said he lives in New York, works as a financial analyst and makes $50,000 a year. Each time the group applied for a loan, it kept a whole range of factors constant.

"The only difference was where he went to school," Welbeck said. It applied as if this fictional borrower went to NYU in New York, many other schools and Howard University — one of the country's most famous historically black colleges and universities.


The group found that if the otherwise identical loan applicant went to NYU instead of Howard, there was a striking difference. For a $30,000 personal loan with a five-year term, it found an applicant would pay about $3,500 more in interest and fees if they went to Howard.

"There's no other explanation that we can really come to terms with other than the fact that where this borrower went to school mattered in terms of how Upstart measured their creditworthiness," Welbeck said.

And it apparently mattered quite a bit. The group also found you'd pay more if you went to New Mexico State University-Las Cruces, which has a high percentage of Hispanic students.

In a new report, called Educational Redlining, the group says lenders may be discriminating based on where loan applicants went to college.

Discriminatory Effects of Credit Scoring on Communities of Color
ABSTRACT

Our current credit-scoring systems have a disparate impact on people and communities of color. These systems are rooted in our long history of housing discrimination and the dual credit market that resulted from it. Moreover, many credit-scoring mechanisms include factors that do not just assess the risk characteristics of the borrower; they also reflect the riskiness of the environment in which a consumer is utilizing credit, as well as the riskiness of the types of products a consumer uses.

Until only a few decades ago, communities and people of color were explicitly excluded from access to low-cost government and other mainstream loans. In the 1930s, the Home Owners Loan Corporation (HOLC) used blatant discriminatory rating systems and "residential security maps" to deem communities of color to be high risk. The Federal Housing Authority (FHA) and Veterans Administration (VA) continued this discrimination into the 1950s. Banks, real estate agents, appraisers, and others also perpetuated redlining and segregation in the housing markets. The passage of the federal Fair Housing Act of 1968 improved conditions, but federal regulatory agencies refused to acknowledge their enforcement responsibilities under the Act until the mid 1970s. It was not until civil-rights groups sued the agencies that the federal government began to collect information on the mortgage-lending practices of the institutions it regulated, and to establish and implement fair-lending examination procedures.

The never-ending cycle: Incarceration, credit scores, and wealth accumulation in the United States

The three of us, in a new working paper, present the first evidence detailing the relationship between an individual’s FICO credit scores, wealth accumulation, race, and incarceration history. Using a sample from Baltimore of white and black individuals with and without a history of incarceration and their FICO score information, our report shows that having a personal incarceration history not only is associated with lower FICO scores but also with lower wealth accumulation.


Congress says 'OK' to racist auto lenders

There is solid evidence that black, Latino, and Asian-American car buyers are charged higher interest rates than white Americans with similar credit histories. Instead of putting a stop to it, Republicans in the House of Representatives are going the extra mile to allow car dealers to discriminate. Most disappointingly, they are being aided and abetted by far too many Democrats.
In the 1990s, lawsuits documented hidden kickbacks that rewarded dealers for marking up the interest rate on many of the loans they arranged for car buyers. This practice consistently led to higher rates for African-American and Latino borrowers, more than for white borrowers with similar credit. Because the higher cost is hidden in the interest rate, this discriminatory lending leads to some consumers paying hundreds or thousands more -- without even knowing..
<<snip>>