Case Western Reserve University and the American Enterprise Institute (AEI) has released a new report that has found that the digitization of mortgages and the rise FinTech lenders may be just what the industry needs to eliminate discrimination in lending.
The new paper, called “The Impact of FinTech on Discrimination in Mortgage Lending” shows that FinTech lenders have little-to-no gap when it comes to lending to minorities even after adjusting for GSE credit-risk pricing determinants and loan size.
According to the paper, historically, lending has been rife with racism. That began to change with the passage of the Civil Rights Act in 1968 which prohibited discrimination based on race, but a continued lack of credit provision to minority communities spurred further government action such as the Home Mortgage Disclosure Act of 1975, which created a monitoring system for credit provision, and the Community Reinvestment Act of 1977, which encouraged credit provision to minority borrowers and enhanced enforcement of fair housing law.
The paper also found that in a matched analysis of observationally similar Black and Hispanic borrowers and non-Black and non-Hispanic borrowers, FinTech lenders provide statistically indistinguishable terms to the two groups.
"The mortgage market has historically been plagued by racial discrimination, and recent data show ongoing disparities in the terms offered to minority borrowers by traditional lenders," said Dr. Daniel Shoag, Associate Professor of Economics at Case Western University and co-author of the study. "This paper uses new, proprietary data to study discrepancies in terms offered to Black and Hispanic borrowers by FinTech lenders. Like prior literature, it finds that, unlike traditional lenders, FinTech loans do not show statistically significant differences in fee-adjusted terms."
"The rise of FinTech lenders has been a game-changer, and our findings also suggest this increased competition has led traditional lenders to adjust their business practices." said Stan Veuger, co-author of the paper and senior economic policy fellow at AEI. "Our data suggest FinTech may not only reduce racial discrepancies in the mortgage market by providing credit directly on similar terms, but that the growth of these lenders may be inducing changes among non-FinTech lenders as well."