Lending Bias and the Challenges That Linger

Slavery and laws inhibiting Black Americans from earning wages ended with the Emancipation Proclamation in 1865. Following its abolishment there were still profound restrictions on Black American freedoms including Jim Crow laws which, historically shaped segregation in the South and dictated how much a Black person could earn, jobs they could perform and where they could go. Despite the outlawing of discrimination and segregation in 1964 with the Civil Rights Act and the introduction of the

Fair Housing Act in 1968, which prohibited redlining an early form of systemic racism, we continue to see discrimination within the housing industry today.



It is important to note that the study outlined below has been criticized by industry experts for the exclusion of data and for the parameters of data that it is basing its findings on. You can read full statements from Fannie Mae and Mortgage Bankers Association at the bottom of this post.

A recent study by The Markup found that, nationally, Black loan applicants were 40-80% more likely to be denied than White applicant’s with similar financial characteristics. They also found that lenders gave less loans to Black applicants than White applicants even if they had high incomes – $100,000 a year or more with the same debt ratios. On top of ample disparities in loan denials on a national level, the study also found disparities in numerous metropolitan areas across the country.

In Chicago, where redlining can be historically traced back to from the 1930’s to the 70’s, Black applicants were 150% more likely to be denied by financial institutions than White applicants with similar characteristics. And in Minneapolis, Native American applicants were 100% more likely to be denied loans than their White counterparts.

So, who approves or denies these loan applicants? Lenders do, with the guidance of an algorithm that ranks credit. Known as “FICO” this scoring model determines whether a loan applicant meets the requirements to be eligible for a mortgage. Typically, an applicant must have a minimum credit score of 620 to pre-qualify for a mortgage, though in some cases a minimum score of 600 is accepted. In addition to strict parameters for the credit scoring model, Fannie Mae and Freddie Mac each have an automated underwriting approval program to help avoid hidden bias in human judgment.

Some factors that are considered in lending, in addition to credit history are; borrowers’ assets, employment status & debt, among others. These automated programs are designed to institute a “color-blind” algorithm however, may still affect individuals differently depending on their race. The deciding factors of these algorithms are largely unshared and the decisions made by Fannie Mae and Freddie Macs’ underwriting software is not included in the Mark Up’s study. It should also be noted that Fannie Mae recently updated its automated lending process to include positive rental history payments beginning in September.

While a number of studies continue to tackle the issue of racial disparities in homeownership, The Markup report should not be considered conclusive. It is important that the lending community continues to strive towards unwrapping the inherent challenges that linger.

On Thursday September 9th Fannie Mae released a statement on the alleged racial bias in the appraisal process saying in part, “Fannie Mae is committed to racial equity in housing, and we take these allegations seriously.” – Jake Williamson VP, Single-Family Collateral Risk Management. In the statement, Williamson outlined what Fannie is doing to mitigate unfair appraisals and one of those aspects is to help lender partners identify any red flags with its Collateral Underwriter® (CU®) tool, a tool Williamson notes goes under routine fair lending audits by the Fannie Mae underwriting team.

Fannie Mae also collaborated with the National Urban League to launch the Appraiser Diversity Initiative (ADI). The ADI is aimed at identifying new candidates in the residential appraisal field, help overcome barriers of entry such as training and education and to open the door for more diversity. Since its creation Freddie Mac and The Appraisal Institute have joined the ADI initiative. You can read Fannie Mae’s full statement here.

Raising awareness and talking about potential racial bias and deep-rooted systemic discrimination in constructive ways is crucial to fostering an environment of positive change. Partnering with Initiatives and forming DE&I Committees within the industry is a great way to engage with partners and stakeholders to make an impact and promote equity and equality.

At the UHOUSI initiative, our mission is to advocate for a more equitable and fair housing industry. In support of our mission, we feel that providing educational resources to first-time minority homebuyers is one way to bring awareness and promote racial equity. You can Follow us on LinkedIn and Facebook to stay current on how we’re supporting our goals to promote equitable and sustainable homebuying in other ways.

Since The Markup study was released the Mortgage Bankers Association has also released a statement in response, which you can read here.