In the second quarter of 2022, the homeownership rate for white households was 75 percent, compared to 45 percent for Black households and 48 percent for Hispanic households. One reason for these differences, virtually unchanged in the last few decades, is uneven access to credit. Studies have documented that minorities are more likely to be denied credit, pay higher rates, be charged higher fees, and face longer turnaround times compared to similar non-minority borrowers. In this post, which is based on a related Staff Report, we show that banks vary substantially in their lending to minorities, and we document an overlooked factor in this difference—the inequality aversion of banks’ stakeholders.
Substantial Differences in Banks’ Lending to Minorities
We use mortgage applications data collected under the Home Mortgage Disclosure Act to calculate banks’ lending to minorities. Our data set consists of 114.3 million loan applications received by 838 banks from 1995 to 2019. For each bank and for each year, we calculate the bank approval ratio, defined as the number of mortgage applications approved divided by the number of mortgage applications received.
The difference in lending to minorities across banks is sizable. The chart below shows the distribution of banks’ “approval gaps”—defined as the difference in the approval ratios for mortgage applications made by minority and non-minority borrowers. Such approval gaps tend to be positive (so that approvals are lower for minority applicants) and heterogenous across banks. Crucially, this variation persists within a narrow geographical area (such as county or census tract), suggesting that banks with small approval gaps are not systematically located in areas of the country where minorities have a relatively low credit risk.
Banks’ Lending to Minorities Varies Substantially