LOS ANGELES (Business Wire) – In a nationwide study, a University of Southern California Lusk Center economist has shown minorities with marginal credit ratings are more likely to have their home loan applications rejected by both minority-owned and white banks. Raphael Bostic, Ph.D., director of the Casden Real Estate Economics Forecast at the USC Lusk Center, compared lending patterns of 75 minority-owned banks with those of white-owned banks in the same areas. “This study sought to debunk a widely held belief that lenders have a preference for members of their own race. We showed that bank underwriting standards are consistent across lenders and are not influenced by the lender’s ethnic background,” said Dr. Bostic, a former advisor to the Federal Reserve Board. “But the results did show that minorities steer their applications to same-ethnicity banks. Consequently, the loan rejection rates at minority-owned banks are higher than those of white-owned banks,” he added.
The study used data from banks reporting to the U.S. Department of Treasury as being majority owned by blacks or Asians. The small number of Hispanic and Native-American owned banks precluded their consideration, according to Dr. Bostic.
Dr. Bostic said his research suggests that banks might want to develop alternative underwriting models because signals of good credit quality may differ among diverse populations. “A smaller down payment is not always a red flag for lower-income applicants,” he explained. “They often make sacrifices to stay in the home – curtailing spending so they can make the house payment. In fact, low-income borrowers prepay less frequently and don’t refinance as often – providing steady streams of income for banks,” he pointed out.
He also suggested the creation of more government programs to help marginal borrowers improve their credit quality through financial counseling and money management curricula aimed at high school students. “We need to break the cycle of poor credit in low-income, minority neighborhoods,” stressed Dr. Bostic.
His research on minority lending rates will be published early next year in the Journal of Financial Services Research. A summary of the findings can be found on the Lusk Center web site.