Bias in the Mortgage Approval Process

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Bias in the Mortgage Approval Process

Racial, ethnic, and other biases have traditionally had an impact on home ownership. Recent studies have labeled the overall decline in racial disparity in housing as “slow, unequal, and fragile”—even in the places where it has improved. There has been little or no progress in certain regions. Events like the COVID-19 epidemic and the Great Recession of 2008 had a negative impact on minority homeownership rates, especially in Latinx and Black communities. According to other research, LGBTQ+ populations may also have difficulties getting finance.

Studies reveal that racial bias—particularly in the mortgage approval process—continues to reinforce racial segregation and impact the racial wealth gap despite the presence of laws that prohibit discrimination in the housing industry. The prejudice that exists in the mortgage lending sector is examined in this essay.

Key Takeaways

  • Mortgage financing is a highly significant industry since roughly 30% of American family income comes from home ownership.
  • The processes involved in obtaining a house mortgage are referred to as mortgage approval.
  • Although overt racial discrimination in lending practices has decreased or stopped, it nevertheless entrenches segregation and affects the racial wealth disparity.
  • Since the Fair Housing Act of 1968 went into force, the housing disparity between White families and Black families has widened, particularly as a result of the Great Recession of 2008.
  • Lenders using algorithms might still exhibit prejudice that is illegal under American law.

Forms of Discrimination

The primary asset of many families, and often a significant amount of their total wealth, is their house. This is especially true for Hispanic and non-white families, whose homes might make up a significant chunk of their total income.

In addition, there are significant racial disparities in the mean value of properties held by families:

  • Black families: $150,000
  • Hispanic families: $200,000
  • Families of white, non-Hispanic origin: $230,000

Most people want loan approval because they cannot afford to buy a property altogether. A number of procedures in this approval process will assist in obtaining a mortgage for them. Homeownership depends on the financing sector, which is expected to expand. Freddie Mac predicts that home demand will increase despite the COVID-19 pandemic’s consequences. According to the agency, house sales will actually hit 6.9 million in 2022 before increasing to 7 million the following year, while mortgage originations will increase from $2.1 trillion to $2.2 trillion.

According to a thorough analysis of the available data conducted by the Urban Institute in 1999, minority homeowners in the United States experienced discrimination from mortgage lending companies in two key ways:

  • Differential Treatment: When eligible minority homeowners are discouraged from applying for a loan, refused a loan, or given disadvantageous loan conditions due to their race or ethnicity.
  • Disparate Impact: This kind of discrimination happens when minority loan applicants are rejected at a greater rate than white applicants in a way that cannot be explained as a business requirement, even if the reasons for this discrepancy aren’t immediately apparent.
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The most overt kind of discrimination in mortgage financing are outright refusals to provide homes. Direct rejections are no longer as common. White, Black, and Hispanic housing disparities have also decreased, but the persistence of disparities suggests discrimination.

Mortgage Discrimination and Homeownership

Any kind of housing discrimination is forbidden under the Fair Housing Act. The legislation, which forbade discrimination in housing on the grounds of race, religion, gender, family status, handicap, and ethnicity, was passed in 1968. The objective was to make sure that everyone had access to housing, whether it came from owning a house or renting one.

Despite the statute, Black Americans still have disproportionately lower homeownership rates than White Americans. This may indicate that prejudice is still present and has an effect on minority homeownership rates. According to Alanna McCargo of the Urban Institute, there is a significant and expanding discrepancy in homeownership across racial and ethnic groups. “We are losing ground, not only because we haven’t made any progress. We cannot keep moving backward, either.

As of the second quarter of 2022, non-Hispanic white Americans made up over 74.5% of homeowners. According to the St. Louis Fed, this contrasts with the 45.3% of Black Americans and the 57.3% of all other races, including Asian, Native Hawaiian, and Pacific Islanders.

Even when they were eligible for prime loans, Black and Hispanic customers who bought houses at the height of the housing bubble were more likely to be granted subprime loans than Whites and Asian Americans, according to McCargo, who also noted that their recovery rates were slower than Whites.

In evidence she released in 2019, Alanna McCargo, the former vice president for housing finance policy at the Urban Institute, said that the racial and homeownership discrepancies in the U.S. were “greater than the gaps that existed when private race-based discrimination was allowed.”

Disparate Rejection Rates and Segregation

Racial prejudice still exists in mortgage loans, according to a 2022 research from the National Community Reinvestment Coalition. Black and Hispanic borrowers continue to experience disproportionately high levels of rejection, according to the study’s authors, despite the fact that the majority of forms of discrimination in the housing market have decreased or stopped (including the most extreme forms, like lying about the availability of advertised housing units).

The research found that although inequalities in mortgage prices still exist for Blacks, Hispanics, and Asians, racial gaps in loan denials marginally reduced between the 1970s and 2020. By forcing people with weak preferences into areas with inhabitants of similar ethnic origins, discrimination like this solidifies racial segregation. By making it more difficult for Blacks to really accumulate money, this just helps to widen the racial wealth divide.

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This conclusion is supported by further research, such as a 2019 LendingTree analysis that found racial variations in loan refusal rates. In that study, non-Hispanic White borrowers had the lowest rejection rates—7.9%—while Black borrowers had the highest—17.4%.

The mortgage financing sector discriminates against LGTBQ+ couples as well. When comparing heterosexual couples with comparable applications, these couples experienced a rejection rate for loans that was 73% higher. Additionally, they had a greater likelihood of paying more in fees and interest.

Historical Discrimination and Laws

In the past, discrimination has influenced how mortgage applications are approved in the US. Some refer to housing disparities as the lasting effects of prior disparities.

During the 20th century, the Federal Housing Administration (FHA) promoted homeownership among white middle-class people. However, the methods it used, such as redlining and restrictive covenants, prevented minorities from receiving mortgage insurance and housing that was subject to federal housing subsidies.

As was already mentioned, the Fair Housing Act outlawed discrimination in housing on the basis of race, ethnicity, and other characteristics. Martin Luther King Jr., who got involved in the fight for fair housing during the 1966 open housing marches in Chicago, was assassinated in the days immediately after the signing of the Fair Housing Act, a follow-up to the 1964 Civil Rights Act. Some claim that the principal goal of the Fair Housing Act was to “curtail discrimination in the housing industry.”

With the passage of the Equal Credit Opportunity Act (ECOA) in 1974, safeguards for dealings with organizations that habitually grant credit, such as banks and other lending institutions, were expanded. It outlaws discrimination on the basis of age, marital status, race, color, religion, national origin, sex, or use of public assistance.

Housing Discrimination in the Digital Age

With rising customer demand for accessible financial services, the emergence of digital apps surged across the financial industry, changing how institutions do business. People may now apply for and get approval for mortgage loans more easily thanks to digital mortgage platforms. However, it also begs the issue of how they handle racial discrimination in the marketplace.

According to a University of California, Berkeley research, fintech doesn’t entirely eliminate prejudice. Many of the studies suggest that loan rejection rates are not biased. Algorithmic lenders did, nonetheless, lessen differences in rejection rates; they did not, however, abolish “unlawful discrimination.” This is due to the possibility that they may categorize customers based on their low levels of purchasing and their participation in less intense competition. They increased the cost of refinancing mortgages for otherwise equal Latinx and Black borrowers by $765 million annually.

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The Markup’s study revealed that, despite having similar financial records, lenders were rejecting mortgage applications from persons of color more often than white applicants in 2019. Even when algorithms are in use, minority applicants are 40% to 80% more likely than white borrowers to be rejected house loans. The fees of mortgage applications, which are sometimes non-refundable, were also mentioned in the research as additional disadvantage for those who aren’t approved.

Which Act Prohibited Discrimination in Housing?

Following the passage of the Fair Housing Act in 1968, it is now unlawful to discriminate against anybody searching for housing on the basis of their race, religion, national origin, gender, skills, or family status. Discrimination in the purchase, sale, rental, and financing of properties, regardless of the kind, is prohibited under the Act’s provisions.

What Are the Warnings Signs That My Lender May Have Discriminated Against Me?

If you were refused a mortgage even though you were eligible for one, if someone made an effort to dissuade you from applying, or if you received a loan with less favourable terms and circumstances, you may have been the victim of discrimination. If your lender cancelled your account without giving you a good explanation, you could also have been subjected to discrimination.

How Do I File a Discrimination Complaint Against a Mortgage Lender?

You may complain to the Consumer Financial Protection Bureau if you think you’ve been treated unfairly by a mortgage lender for any reason. You may contact the organization directly by dialing 1-855-411-CFPB or submitting your complaint online (2372).Check the relevant website for additional details. Some state governments also defend citizens against other types of discrimination.

The Bottom Line

Up to 40% of the wealth of a typical American family is attributable to home ownership. This implies that obtaining a mortgage approval might be a significant roadblock to financial security.

Several adjustments that McCargo said would help the problem were addressed in her testimony. Her recommendations included encouraging the development of an equitable housing finance system that takes into account the fact that minorities are more likely than others to lack a credit history, as well as the expansion of credit access, modernization of the FHA, and updates to credit scoring systems. Among other things, McCargo proposed enhancing down payment assistance programs, developing a “strong small-dollar mortgage market,” and providing outreach and counseling to renters and millennials who are ready to buy a house.

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