Digital mortgage applications result in less discrimination, study finds

Digital mortgage applications are having the positive effect of reducing discrimination of black and Latino home buyers, a new study shows. The study, by the National Bureau of Economic Research, reveals that algorithmic lending reduces discrimination by up to 40% compared to applications which are dealt with face-to-face.

With digital mortgage applications, the interest rates offered to black and Latino applicants are generally closer to those offered to white borrowers, the study found.

With traditional loan applications, black and Latino borrowers typically get offered interest rates that are 0.79% higher than those offered to whites. In 2009, black and Latino applicants were generally offered interest rates of around 1.25% higher than whites.

But with digital mortgages becoming more common, discrimination is lessening. These days, more mortgage firms use application-based, algorithmic processes to deal with loan applications, and less face-to-face time. And now, the National Bureau of Economic Research’s data shows that black and Latino buyers are paying just 0.53% higher interest than other demographic groups.

Blacks and Latinos are also less likely to be denied a mortgage altogether when using a digital application process. With traditional applications, people in those groups are rejected around 6% more often than whites. But with automated applications, the rejection rate is similar across all groups, the report found.

More lenders are offering algorithmic loan originations. “While these lenders continue to provide conventional, face-to-face loan applications, the trend is clearly toward automated underwriting,” researchers note in the study.