Bias in the Mortgage Approval Process

Discrimination and inequalities persist

Homeownership has historically been influenced by racial, ethnic, and other prejudices. Even in the areas where it has improved, recent studies have characterized the reduction of racial inequality in housing generally as “slow, uneven, and fragile.' In certain areas, there has been little to no improvement. Events such as the Great Recession of 2008 and the COVID-19 pandemic also diminish minority homeownership rates, particularly for Latinx and Black communities. Other studies suggest LGBTQ+ communities also face challenges when it comes to accessing financing.

Despite the existence of laws that prohibit discrimination in the housing market, studies show that racial bias—particularly in the mortgage approval process—continues to entrench racial segregation and influence the racial wealth gap. This article explores some of the bias that exists in the mortgage lending industry.

Key Takeaways

  • Homeownership comprises nearly 30% of American household wealth, making mortgage lending a very important business.
  • Mortgage approval refers to the actions connected to securing a home mortgage.
  • Aggressive lending discrimination tactics have declined or ceased but racial bias in the lending process continues to entrench segregation and influence the racial wealth gap.
  • Since the Fair Housing Act of 1968 became law, the housing gap between minorities and White families continues to grow, driven primarily by the effect of the 2008 Great Recession.
  • Algorithmic lenders don't entirely eliminate impermissible bias as considered under American law.

Forms of Discrimination

For many families, their home is their single biggest asset, and can represent a significant proportion of their overall wealth. This is particularly the case for non-white and Hispanic families, whose houses can account for a significant portion of their overall wealth.

Moreover, there are large gaps in the typical value of homes owned by families depending on race:

  • Black families: $150,000
  • Hispanic families: $200,000
  • White, non-Hispanic families: $230,000

Since most individuals can't afford to purchase a home outright, they need to be approved for a loan. This approval process involves a series of steps that will help get them a mortgage. The lending industry is key for homeownership and is an industry that's projected to grow. According to Freddie Mac, demand for housing is expected to grow even with the effects of the COVID-19 pandemic. In fact, the agency estimates home sales to reach 6.9 million in 2022 and rise to 7 million in 2023, and mortgage origins to grow from $2.1 trillion in 2022 to $2.2 trillion the following year.

A comprehensive review of the evidence published by the Urban Institute in 1999 found that minority homeowners in the U.S. faced discrimination from mortgage lending institutions, which took two main forms:

  • Differential Treatment: This occurs when qualified minority homeowners are discouraged from taking a loan, denied a loan, or are offered unfavorable loan terms because of their race or ethnicity.
  • Disparate Impact: This form of discrimination is present when minority loan seekers are disqualified at a higher rate than whites in a manner that cannot be justified as a business necessity, even when the reasons why this difference exists aren’t immediately obvious.

Direct denials of housing availability are the most naked forms of mortgage lending discrimination. The prevalence of direct denials has declined. Housing inequalities among whites, Blacks, and Hispanics have also declined, but the continued existence of inequalities points toward discrimination.

Mortgage Discrimination and Homeownership

The Fair Housing Act prohibits housing discrimination of any kind. The law was enacted in 1968 and outlawed housing discrimination based on race, religion, gender, family status, disability, and ethnicity. The goal was to ensure access to housing, whether that's through home purchases or rentals, to everyone.

Despite the law, homeownership rates for Black Americans are still disproportionate compared to those for white Americans. This suggests that discrimination may be ongoing and impacting minority homeownership rates. According to Alanna McCargo of the Urban Institute, there's a large gap in homeownership for racial and ethnic homeowners that continues to grow. "We have not simply failed to make progress; we are losing ground. And we cannot continue to go backward.”

Over 74.5% of homeowners were non-Hispanic white Americans as of the second quarter of 2022. Compare that to 45.3% of Black Americans and 57.3% of all other races, including Asian, Native Hawaiian, and Pacific Islanders, according to the St. Louis Fed.

Black and Hispanic consumers purchased homes during the peak of the housing bubble and were more likely to be offered subprime loans than whites and Asian Americans, even when they qualified for prime loans, according to McCargo, who also stated that their recovery rates were slower than whites.

The former vice president for housing finance policy at the Urban Institute, Alanna McCargo, published testimony in 2019 that described the racial and homeownership gaps in the U.S. as “worse than the gaps that existed when private race-based discrimination was legal.”

Disparate Rejection Rates and Segregation

A 2022 study from the National Community Reinvestment Coalition reported that racial discrimination persists in mortgage lending. While most forms of discrimination in the housing market declined or ceased (including the most extreme forms, such as lying about the availability of advertised housing units), the authors of the study said that Black and Hispanic borrowers still face disproportionately high levels of rejection.

According to the study, racial gaps in loan denial decreased slightly between the 1970s and 2020, while gaps in mortgage costs remain for Blacks, Hispanics, and Asians. Discrimination like this entrenches racial segregation by pushing those with weak preferences to neighborhoods made up of residents with similar racial backgrounds. This only serves to fuel the racial wealth gap by making it harder for Blacks to actually build wealth.

Other studies also corroborate this finding, including a 2019 LendingTree report, which indicated racial differences in lending rejection rates. According to that report, Black borrowers have the highest denial rates, at 17.4%, and non-Hispanic Whites have the lowest, at 7.9%.

LGTBQ+ couples also face discrimination by those in the mortgage lending industry. These couples faced 73% higher rates of loan rejection than heterosexual couples with similar applications. They also were more likely to be charged higher fees and higher interest rates.

Historical Discrimination and Laws

Discrimination has historically shaped the mortgage approval process in the United States. Some characterize housing inequalities as the lingering hangover of historical inequalities.

The Federal Housing Administration (FHA) encouraged white middle-class homeownership during the 20th century. But the practices it used, including redlining and restrictive covenants, denied minorities access to federally subsidized housing and mortgage insurance.

As noted above, the Fair Housing Act made housing discrimination based on race, ethnicity, and other factors illegal. A follow-up to the 1964 Civil Rights Act, the Fair Housing Act was signed in the days immediately after the assassination of Martin Luther King Jr., who became affiliated with the struggle for fair housing during the 1966 open housing marches in Chicago. According to some, the Fair Housing Act's main objective was to “curtail discrimination in the housing sector.”

The Equal Credit Opportunity Act (ECOA) of 1974 broadened protections to interactions with places that regularly extend credit, including banks and other institutions that offer home loans. It makes it illegal to discriminate because of race, color, religion, national origin, sex, marital status, age, or use of public assistance.

Housing discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, then there are steps you can take. One such step is to file a report with the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD).

Housing Discrimination in the Digital Age

The rise in digital applications swept through the financial sector with increasing consumer demand for financial service accessibility, making changes to the way institutions do business. Digital mortgage platforms now make it easier for people to apply for and get approval for mortgage loans. But it also raises some questions about how they address discrimination in the market.

A University of California, Berkeley study found that fintech doesn’t completely remove bias. According to the findings, many show no discrimination in loan rejection rates. But while algorithmic lenders reduce disparities in rejection rates, they did not eliminate “impermissible discrimination.” That's because they may profile consumers for low-shopping behavior and those who operate in weaker competitive environments. They charged otherwise equivalent Latinx and Black borrowers $765 million more per year for refinancing mortgages.

An investigation conducted by The Markup highlighted how lenders were turning down more people of color for mortgages compared to white applicants in 2019, even though they had the same financial backgrounds. Overall, minority borrowers were 40% to 80% likely to be denied home loans compared to white consumers even when algorithms are at play. The report also highlighted the costs associated with mortgage applications, which are often non-refundable, as being another strike against those who aren't approved.

Which Act Prohibited Discrimination in Housing?

The Fair Housing Act was passed in 1968, making it illegal to discriminate against anyone looking for housing based on their race, religion, national origin, gender, abilities, and family status. The provisions of the Act include discrimination related to the purchase, sale, rental, and financing of homes, regardless of the type.

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

You may have been discriminated against if you were denied a mortgage even if you qualified for it, made attempts to discourage you from applying, or gave you a loan with less favorable terms and conditions. You may have also been discriminated against if your lender closed your account without a valid reason.

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

If you believe you've been discriminated against by a mortgage lender for any reason, you can file a complaint with the Consumer Financial Protection Bureau. You can file your complaint online or by calling the agency directly at 1-855-411-CFPB (2372). Some state governments also protect residents against other forms of discrimination, so be sure to check the appropriate website for more information.

The Bottom Line

Homeownership accounts for as much as 40% of the wealth of a typical household in the United States. This means the mortgage approval process could be a large hurdle on the road to wealth and stability.

McCargo’s testimony highlighted several changes that she said would improve the situation. Her recommendations included promoting an equitable housing finance system that is sensitive to the fact that minorities are more likely to lack a credit history, as well as an expansion of credit access, an update of credit scoring systems, and modernization of the FHA. McCargo also suggested improving down payment assistance programs, creating a “robust small-dollar mortgage market,” and outreach and counseling for renters and home-ready millennials, among other proposals.

Article Sources
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  1. Sci-Hub. "Racial Discrimination in the U.S. Housing and Mortgage Lending Markets: A Quantitative Research of Trends, 1976-2016," Download "Download (pdf, 1.62 MB)," Page 2 of PDF.

  2. Urban Institute. “Statement of Alanna McCargo, Vice President for Housing Finance Policy, Urban Institute,” Page 15.

  3. ​Federal Reserve Bank. “Disparities in Wealth by Race and Ethnicity in the 2019 Survey of Consumer Finances."

  4. Freddie Mac. "Quarterly Forecast: The Housing Market Expected to Remain Stable Despite Rising Rates and Cooling Price Growth."

  5. Urban Institute. “Mortgage Lending Discrimination: A Review of Existing Evidence,” Pages 3-4.

  6. Sci-Hub. "Racial Discrimination in the U.S. Housing and Mortgage Lending Markets: A Quantitative Research of Trends, 1976-2016," Download "Download (pdf, 1.62 MB)," Page 1 of PDF.

  7. The United States Department of Justice. "The Fair Housing Act."

  8. Urban Institute. “Statement of Alanna McCargo, Vice President for Housing Finance Policy, Urban Institute,” Page 2.

  9. Federal Reserve Bank of St. Louis. "Homeownership Rates by Race and Ethnicity: Non-Hispanic White Alone in the United States."

  10. Federal Reserve Bank of St. Louis. "Homeownership Rates by Race and Ethnicity: Black Alone in the United States."

  11. Federal Reserve Bank of St. Louis. "Homeownership Rates by Race and Ethnicity: All Other Races: Total in the United States."

  12. Urban Institute. “Statement of Alanna McCargo, Vice President for Housing Finance Policy, Urban Institute,” Page 5.

  13. National Community Reinvestment Coalition. "Discrimination In Mortgage Lending Persists Due To Trump. Now Biden’s Working To Combat It."

  14. LendingTree. “LendingTree Analysis Reveals Mortgage Denials at Cycle Low.”

  15. Proceedings of the National Academy of Science of the United States of America. “Lending Practices to Same-Sex Borrowers.”

  16. JSTOR: Law & Social Inquiry: Volume 32, Issue 2, Spring 2007. “Insuring Inequality: The Role of the Federal Housing Administration in the Urban Ghettoization of African Americans,” Pages 399–434.

  17. U.S. Department of Housing and Urban Development. “History of Fair Housing.”

  18. U.S. Federal Trade Commission. “Your Equal Credit Opportunity Rights,” Page 1.

  19. University of California, Berkeley. “Consumer-Lending Discrimination in the FinTech Era,” Page 1.

  20. The Markup. "The Secret Bias Hidden in Mortgage-Approval Algorithms."

  21. Urban Institute. “Statement of Alanna McCargo, Vice President for Housing Finance Policy, Urban Institute,” Pages 14–18.

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