Home shopping and investment property buying are rapidly joining the digital arena. Can technology offer new models to alleviate bias in lending practices?
The expanding property tech trend offers convenience in mortgage and property shopping. It offers effective ways to market properties for property owners and managers, now that marketing messages can be placed online to show loan options for interested applicants to use instantly. But for some home seekers, a big concern is how real estate tech profiles apartment and mortgage loan applicants. Are apps, at least in some situations, having racially skewed effects? Can the slant be changed to better fit fair housing law and policy? These questions are now ripe.
Emerging Issue: Algorithmic Discrimination
Most any prospective apartment shopper, of course, goes through background checks. And today’s mortgage apps scan loan applicants’ financial accounts to quickly assess how much the hopeful home buyers are eligible to borrow. Both apartment property owners and mortgage companies must follow anti-discrimination laws. But what about their online screening tools?
In the best of scenarios, apps can make totally neutral, unbiased decisions. People may submit remote applications without their appearances being judged. They can obtain their pre-approval letters online, then adjust their terms and conditions, with Rocket Mortgage, Roostify, SoFi, Better.com, Blend.com and others. All background information is handled by the online software.
What’s more, a loan approval can be found online for just half the price of a standard mortgage agreement. And the digital loan product is the same in the end, as mortgage apps sell mortgages to banks, Fannie Mae, and the other usual players in the secondary loan market. Digital screeners assess financial data to discern a borrower’s default risk — using criteria developed by the Consumer Finance Protection Bureau — the same way brick-and-mortar banks do: by looking at the applicant’s credit profile, debt, income and assets and so on.
But the other side of this is the way tech gets in the middle, possibly shielding companies from their legal responsibility to make fair and equitable decisions.
In the 2015 case Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, the U.S. Supreme Court said apartment applicant screening technology violates the Fair Housing Act if it creates discriminatory approval (“disparate impact”) rates. Yet faced with a recent challenge in federal district court against its tenant screening tools, tech company CoreLogic claimed it is not subject to the Fair Housing Act because its screener doesn’t actually decide who can move in. A human being greenlights approval based on a review of the screener’s results.
Right in the middle of this tension, the Department of Housing and Urban Development is making it harder for people to claim they’re facing discrimination due to the use of screening apps. Fair housing advocates and groups addressing algorithmic discrimination are alarmed. And they aren’t alone. The National Association of Realtors® publicly objected, in July 2020, that HUD changes then underway were eroding the long-standing policy of inclusivity that the Fair Housing Act stands for. NAR also observed that the problem is even worse because of Covid-19’s outsized economic impacts on those coping with racial bias in many other facets of their lives.
Home Hunting While Black: Frustration and Hope in the Digital Era
We’ve had the Fair Housing Act since 1968. Over these five decades, though, the rate of U.S. Black home ownership has hardly increased. What’s standing in the way? It’s usually the mortgage approval process.
In 2019, the Consumer Finance Protection Bureau found that Black borrowers take out the smallest loans; and, moreover:
“Black and Hispanic White borrowers continued to be much more likely to use nonconventional loans insured by Federal Housing Administration (FHA) or a guarantee from the Department of Veterans Affairs (VA), the Farm Service Agency (FSA), or the Rural Housing Service (RHS) than other racial and ethnic groups.”
Why are these nonconventional loans particularly sought-after in minority communities? Why are conventional loans less likely to be available? What underlies the loan approval obstacles?
For one thing, the problem of race-based restrictive covenants lingers — as does the long-tail effect these clauses have had across the country. In addition, fair housing advocates say government regulators and banks cling to assumptions and methods that should be changed to create a fairer playing field. For one thing, they believe housing applicants should be able to offer a different fact set for credit scoring. For example, an applicant’s good history of paying rent should make a difference. Credit scoring companies usually don’t account for rental payments, which are the main financial obligations of most Black U.S. residents.
Then again, could offering more fact sets create new sets of biases? Expect to see a lot of debate and study on this issue in the years ahead. One study, Consumer Lending Discrimination in the FinTech Era, finds reason for hope. Here are its two key findings, in the researchers’ own words:
- “We find that lenders charge Latinx/African-American borrowers 7.9 and 3.6 basis points more for purchase and refinance mortgages respectively, costing them $765M in aggregate per year in extra interest.”
- “FinTech algorithms also discriminate, but 40% less than face-to-face lenders.”
In short: traditional lending is apt to discriminate, and discrimination takes a heavy financial toll. Digital lending might be able to help even things out. Additionally, the researchers point out, online platforms might be boosting competition, and their user-friendly style could be inspiring more people to think about buying, and to go ahead and apply for a home loan.
Unwelcome Practices: Taking Advantage of the Contract for Deed
Another major issue on our radar screen is the unfair use of the contract for deed. When used fairly, contract-for-deed arrangements create options for people who might not otherwise be able to own a home. Used unfairly, these rent-to-own style agreements arguably violate the Fair Housing Act and other anti-discrimination provisions.
In communities that have suffered most in recessions, where people’s credit ratings have been battered, many residents are being offered contract-for-deed deals. They’re agreeing to these offers when they feel unable to get homes in any other way. Harbour Portfolio is one of the companies purporting to sell houses in low-income areas with contract for deed agreements. A legal aid group, the Atlanta Legal Aid Society, helped bring a legal action claiming Harbour has dealt in predatory loans — a charge the corporation, while charging interest rates of around 10%, denied. The issues presented to the court were:
- The real estate company buys distressed homes and invests no money into renovations.
- The new occupants are expected to fix the houses, insure them, and pay the tax bills.
- These same occupants can face eviction if they fall behind even a month in their payments.
- Most of the hopeful homeowners were not expected to receive their deeds. Most would never obtain homeownership; they’d be evicted first.
The Consumer Financial Protection Act also comes into play when companies use misleading and harmful practices. In June 2020, the Consumer Financial Protection Bureau settled for $35,000 with Harbour for violating the Act.
Closing the Gap: Can Mortgage Tech Step Up?
Practices like the above-described misuse of the contract for deed must end if we’re serious about closing the U.S. homeownership gap. Justice-minded legal aid groups are doing their best. At the same time, what’s needed is more opportunity, so people aren’t constantly driven into bad deals for lack of options.
And the need is critical. Fifty years after we got the Fair Housing Act, the rate of Black homeownership is still under 50%, whereas the white homeownership rate is above 72%. In the midst of a global conversation about racial fairness, mortgage companies have a major role to play. The way they use technology could make a world of difference.
Supporting References
John Wake, The Paradox Of The U.S. Black Home Ownership Rate, Forbes (Sep. 19, 2020).
Lauren Kirchner, Locked Out: Can Algorithms Violate Fair Housing Laws? The Markup (Sep. 24, 2020).
Jennifer Miller, Is an Algorithm Less Racist Than a Loan Officer? The New York Times (Sep. 18, 2020).
Alana Semuels, A House You Can Buy, But Never Own, The Atlantic (Apr. 10, 2018).
Photo credit: Christina @ wocintechchat.com, via Unsplash.