A few years ago, getting a mortgage loan was a humbling task. You’d wait in the lobby of a bank for a loan officer to usher you to a desk where you’d plead your worthiness. It didn’t feel like banks needed or even wanted your business; it seemed more like they were doing you a favor by even considering you for a loan.
And then came the great online equalizer, websites empowering consumers to shop mortgage rates, terms and lenders, and fire off their applications. Gone were the days of hat-in-hand borrowing — and, theoretically at least, discrimination. If they can’t see you, lenders can’t discriminate, right?
Email requests for mortgage information
Studies have determined that minorities pay higher mortgage rates than whites do — a little more than a quarter point higher, on average. That small amount can make a big difference in the total interest paid over the life of a loan.
But as the mortgage industry rushes to meet consumer demand for online convenience, you’d think email inquiries and Web-based applications might level the playing field a bit. Some researchers decided to find out by designing an email correspondence test that measured the difference in treatment, if any, between email inquiries from applicants with different races and credit scores.
In the three-year study released in January, led by Dr. Andrew Hanson, associate professor of economics at Marquette University, along with colleagues from Texas Christian and Georgia State, identical emails were sent to mortgage loan originators (MLOs) — “basically, loan salespeople,” Hanson tells NerdWallet — asking for preliminary information regarding a home loan.
“Each mortgage loan originator received two emails,” Hanson says. “One from a person with a ‘white’ name, another from a person with a ‘black’ name. And we tracked: Did they respond to neither of them, both of them, or only one of them? And if they responded, how did they respond?” Responses were graded on the amount of detail they contained or on follow-up.
The test used names that had a “high likelihood of being given to only one race,” based on a sample of birth certificates for male babies born in New York City in 1990, like Kadeem Jefferson and DaShawn Banks or Zachary Miller and Jake Krueger.
Each email was also assigned a low credit score, a high credit score, or no credit score at all.
The results: Most lenders don’t discriminate, but …
The authors sent more than 10,000 emails to more than 5,000 loan originators. Automated responses or out-of-the-office replies were excluded from the result.
In the end, 1.8% of the mortgage loan originators did not respond to inquiries from those with African-American names.
“Overall, most lenders don’t discriminate,” Hanson says. “But we also find that for a small segment of the market — about 2% of the lenders — we do find differential treatment. And that comes in the form of responding only to the client with the white name and not to the client with the African-American name. We also find some additional discrimination in lenders that reply to both of these inquiries, in that they tend to favor the response to the whites.”
By “favor,” Hanson means that these lenders offered more details about a loan, or suggestions on how to apply, or other helpful information — including sending a follow-up response — to those with white names.
A ‘highly’ relevant result
Finding only a 2% rate of discrimination may sound small, but Hanson insists that statistically it’s “highly” relevant. If you’re an applicant with an African-American name, you might not receive a response to your request for loan information from these companies, or you might have your loan processes delayed by a slow response or even be “pushed into a high-interest loan,” Hanson says.
“It exists in the market, but it’s not rampant,” he adds.
With more than 10,000 lending institutions nationwide, if 2% discriminate, that’s a fairly significant number.
A ‘black’ name equals a lower credit score
Perhaps most surprisingly, the study concluded that mortgage lenders’ response rates to those with African-American and white names differed by the same amount as their response rates to applicants with 71 points’ difference in their credit scores.
“If you equate them, the response rate difference between whites and African-Americans is essentially the response rate that we would find if you sent out applications with a 700 credit score versus a 629 credit score,” Hanson says.
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