An Unintended Consequence of Mortgage Financing Regulation – a Racial Disparity

James B. Kau (), Lu Fang () and Henry J. Munneke ()
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James B. Kau: University of Georgia
Lu Fang: Longwood University
Henry J. Munneke: University of Georgia

The Journal of Real Estate Finance and Economics, 2019, vol. 59, issue 4, No 2, 549-588

Abstract: Abstract This study investigates whether mortgage financing regulation unintentionally leads to minorities paying a higher loan contract rate under a risk-based pricing system. We provide evidence that minority borrowers prepay less frequently than comparable non-minority borrowers and thus have lower termination risk. Racially neutral lending policies prohibit the lender from considering this reduced termination risk, resulting in a disparate impact from the overstatement of a minority borrower’s termination risk. While we find little evidence of a rate differential among borrowers under the current regulatory structure, results show minorities pay a higher rate when the variation in termination risk is recognized.

Keywords: Mortgage discrimination; Prepayment; Default; And regulation; G21; G28; J15; R20 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (7)

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DOI: 10.1007/s11146-018-9683-y

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