Racial Discrimination Alive and Well in Finance Biz

News & Politics

Responding to this post, a Certain Someone writes:

Credit is one of those weird areas where there is a lot of belief in discrimination, but as far as I can tell, not all that much evidence.

[. . .]

Yes, I've seen the research arguing that people in black communities get worse loan terms than their credit score suggests. As far as I can tell, this research failed to control for some pretty major factors, like assets. . .

[. . .]

Most of the aggregate research I've seen fails to reject the null hypothesis that there is no discrimination in loan markets . . .

Would that that were true. But actually, the bulk of the academic literature on this subject suggests that there is a significant degree of racial discrimination in loan and credit markets.

To be fair, it's not easy to determine the extent to which discrimination occurs. The available datasets are incomplete. Researchers don't necessarily know which variables the lenders and creditors are looking at when considering credit or loan applications, or how those variables are weighted.

Nevertheless, researchers have been able to get their hands on some unusually rich datasets, which they've examined using the most plausible specifications as to the lending criteria.

There are basically two types of credit discrimination that occur: discrimination based on the race of the applicant, and discrimination based on the racial composition of the neighborhood where the applicant resides (the latter type of discrimination is known as "redlining").

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