FSIC Blog Post – New Research on Reducing Discrimination in Mortgage Lending

The devastating effect that institutional racism has had in the housing industry is an unfortunate and well-documented fact. The lasting effects of that racism and the degree to which it has persisted help explain a white homeownership rate of 73.8% compared to a black homeownership rate of only 45.1%.

With a significant problem like this, many overhauls and improvements are required in the housing industry to achieve fairer economic opportunities. The growth of technology-based lending, or “fintech,” is one area that shows tremendous promise.  Recent research from Case Western Reserve University’s Daniel Shoag finds that fintech is remarkably successful at removing racial bias in real estate lending. Using a matched analysis of similar black, Hispanic, and white borrowers, Shoag finds that fintech lending produces virtually identical terms after adjusting for credit-risk pricing determinants and loan size.

Furthermore, Shoag finds suggestive evidence that pervasive use of fintech in a given zip code is associated with more minor lending discrepancies, even among traditional lenders.  Shoag’s research complements our recent findings that algorithmic lending and artificial intelligence have made progress in reducing bias in mortgage lending.  The use of fintech is not a silver bullet against institutional biases ingrained in our systems. However, conducting lending innovation is one crucial component of establishing a more inclusive housing system that works for everyone.

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FSIC Housing Task Force Blog Post Shoag Research 10-5-21