We speak about equality and equality of opportunities, but are the opportunities available for all really the same, or is it just something written somewhere and subsequently forgotten? Constitutions of various countries around the world advocate the word ‘equality,’ mentioning race as an important factor for non-discrimination, but having a law in theory and actually following one, in reality, is completely different This is evident from the presence of widespread racism around the world. There have been so many reports of racism in police arrests, sporting events, the corporate sector, and every day-to-day occurrence such that the lives of those affected are radically different from those unaffected. Be it dark-skinned, Hispanics, Asian, etc no one is immune from racist slurs, such is the plight of our society, and if this was not enough another aspect of discrimination is the derogatory mindset towards women. Both these, and several other forms of discrimination while severely and widely condemned are today, a harsh reality, and something which has never been addressed seriously much less prevented which has led to the situation becoming worse to an extent that it even causes monetary issues for them.
The influential 1992 Boston Federal Reserve Study concludes that “race does play a role as lenders consider whether to deny or approve a mortgage loan application.” Studies show that money lenders reject applications submitted by dark-skinned people far more frequently than those submitted by fairer skin individuals, which is a clear-cut example of racism. These studies control for the risk factors that lenders consider before lending to people in general.
If lenders do decide to extend credit to the Blacks then they unfairly charge them an amount far more significant than what they ordinarily would have, if it was a white person applying for credit of the same amount. As a result of this blacks tend to become less likely to even apply for a loan in the first place due to the fear of getting rejected or having to pay a higher interest rate than what is normally charged. This also adversely affects businesses as a black- owned business finds it difficult to get loans and this would pose as a barrier to their growth and sustainability. Growth aside, it can further be discouraging to start a business venture as well, as no individual would want to start a venture knowing that the scope of growth is limited.
There have been several precedent cases that strongly support the aforementioned researches and statements. One being the case against Countrywide Financial Corporation, which was settled for $355 million in December 2011. This case was said to be the largest discriminatory lending case in history, wherein more than two hundred thousand dark skinned and Hispanic borrowers who qualified for availing regular loans were charged higher than ordinary bank fees. Another case, known as the Wells Fargo case, which was settled for $175 million in July 2012, revealed that the nation’s largest home mortgage lender, through its mortgage brokers had either charged significantly higher fees for minority borrowers across the country, or had wrongfully steered them into subprime loans, while on the other hand white borrowers with same or similar risk profiles would receive prime lending rates.
The extent of discrimination
This sort of discrimination is not only limited to be against black and Hispanic individuals but also against their religious organizations and churches as a whole. Such churches on average pay much more money for their mortgages as compared to other churches situated in the same area or an area with the same mortgage rates.
Other reasons for differential interest rates
Many people are not given credit or are given credit, albeit with stricter norms because they are considered not to be trustworthy enough to pay the amount back. Hence the minorities like the black and the Hispanics are not given credit easily solely on the basis of their past history of defaulting or lacking the requisite financials to pay back the loan. If a company finds that there is a small chance the borrower might default then they charge a relatively higher interest rate as well for security.
The Current State of Affairs
With the current digitization throughout the world, there has been a rise in electronic loan applications using the means of the telephone or internet. This eliminates personal contact with the loan giver as a result of which race is excluded, which in turn causes the standard information used in e-application to often be racially and ethnically blind. (Yazer (2006)). Au contraire, platforms like Rock mortgage are designed with complex artificial intelligence
algorithms and machine learning systems that are actually flawed. The algorithms used are based on the dataset that was used in the past which had a bias, because historical patterns are used in order to predict future data.
Apple co-founder Steve Wozniak and the chief technology officer David Heinemeier Hansson of Basecamp, both reported an alarming situation wherein their wives got a lower amount of credit offered when they applied online despite the women having a similar credit profile as their spouse. These incidents further prove that the algorithms can be faulty as well unless there are codes written specifically to remove the bias that is present in the existing data so the future applicants don’t have to pay a higher interest or even worse, get rejected.
Yazer, A. (2006), “Discrimination in Mortgage Lending,” Chapter 12 of A Companion to Urban Economicsedited by Arnott, R. And McMillen, D., Blackwell Publishing Ltd.
Cheng, P., Lin, Z. & Liu, Y. Racial Discrepancy in Mortgage Interest Rates. J Real Estate Finan Econ 51, 101–120 (2015). https://doi.org/10.1007/s11146-014-9473-0
Foohey, Pamela, “Lender Discrimination, Black Churches and Bankruptcy” (2017). Articles by Maurer Faculty. 2551. https://www.repository.law.indiana.edu/facpub/2551
J., K. J. K. (2019, November 15). Disparity in home lending Costs minorities MILLIONS, researchers find. CBS News. https://www.cbsnews.com/news/mortgage-discrimination- black-and-latino-paying-millions-more-in-interest-study-shows/