Fair lending litigation reduces racial bias in mortgage markets
New Federal Reserve research finds that fair lending litigation significantly reduces racial discrimination in mortgage markets. Legal settlements for discrimination against Black borrowers led to lower denial rates and increased origination rates for Black applicants.
Litigation drives measurable change
The study, drawing on a comprehensive dataset of fair lending legal actions from 1991 to 2023, provides empirical evidence that such litigation effectively impacts mortgage lender behavior.
Following legal settlements where discrimination against Black borrowers was identified, lenders demonstrated a marked reduction in denial rates for Black applicants.
This reduction was substantial enough to offset pre-litigation racial disparities in denial rates specifically at the banks involved in the litigation, when compared to their direct competitors.
Furthermore, the research indicates a positive trend in origination rates for Black applicants in the post-litigation period, suggesting a broader improvement in access to credit.
This granular approach highlights the direct causal link between legal intervention and measurable changes in discriminatory practices, providing a strong foundation for policy discussions on regulatory effectiveness.
Spillover effects on non-litigated banks
Fair lending laws are designed to ensure equitable access to credit, preventing discrimination based on race, religion, sex, or other protected characteristics.
Despite these regulations, concerns about persistent racial disparities in mortgage lending have remained a significant issue for policymakers and consumer advocates.
This FEDS paper addresses this gap by leveraging a unique dataset, offering a clearer picture of how legal interventions translate into tangible changes in lending outcomes.
The findings underscore the critical role of active enforcement in achieving the objectives of fair lending legislation.
The researchers also observe evidence of a spillover effect on the approval decisions of non-litigated banks operating in the same city as a litigated bank, suggesting a broader impact beyond the directly targeted institutions.
Enforcement's proven power
This study offers compelling evidence that fair lending litigation effectively reduces racial discrimination in mortgage markets.
The observed spillover effects on non-litigated banks suggest a broader positive impact, fostering more equitable lending practices across the industry.
For regulators, this underscores the critical value of proactive enforcement in driving systemic change, moving beyond mere compliance to genuine behavioral shifts.