Closing the Gap: Achieving Parity in Bank Loans for Black and White Americans

Introduction:

Access to financial resources, including loans, is a critical component of economic well-being and upward mobility. However, historical disparities in lending practices between Black and White Americans have persisted, resulting in unequal access to credit. This article delves into the disparities in loan amounts between Black and White borrowers and explores recent data that showcases the progress made in bridging this divide.

Historical Disparities in Lending:

For decades, Black Americans have faced systemic barriers when seeking loans from banks and financial institutions. Discriminatory practices, such as redlining and racially biased lending decisions, have contributed to Black borrowers receiving smaller loan amounts than their White counterparts, even when their financial profiles were similar.

Data from the past has shown significant disparities in mortgage lending, with Black homebuyers receiving smaller loan amounts, being charged higher interest rates, and having a higher likelihood of loan denial. These disparities perpetuated the racial wealth gap and hindered the ability of Black families to accumulate wealth through homeownership.

Recent Data and Progress: 

Recent data and initiatives indicate that progress is being made in addressing these disparities:

1. Home Mortgage Disclosure Act (HMDA) Data: The HMDA data for 2019 and 2020 reveal improvements in mortgage lending equity. In 2019, the denial rate for conventional home purchase loans was 19.4% for Black applicants, compared to 8.8% for White applicants. In 2020, these rates dropped to 16.1% and 7.1% for Black and White applicants, respectively.  
2. Closing the Gap: The gap in loan approval rates between Black and White borrowers has been gradually decreasing, thanks in part to fair lending   enforcement and increased awareness of lending disparities.  
3. Affordable Housing Initiatives: Initiatives and programs aimed at increasing   affordable housing options, particularly for minority communities, have been introduced at both federal and state levels.  
4. Financial Education: Efforts to provide financial education and counseling to underserved communities have helped individuals improve their financial literacy   and creditworthiness.  
5. Policy Advocacy: Advocacy groups continue to push for policies that promote equitable lending practices and homeownership opportunities for marginalized communities.

Ongoing Challenges:

Despite these positive developments, challenges persist. Achieving full parity in loan amounts for Black and White borrowers remains an ongoing process. Some factors contributing to these challenges include:

1. Credit Scoring Models: Traditional credit scoring models may not fully capture the creditworthiness of individuals who lack substantial credit histories, potentially affecting the loan amounts they receive.  
2. Income Disparities: Persistent income disparities between racial groups can influence the loan amounts borrowers can qualify for.  
3. Lender Practices: Variations in lending practices and biases at individual financial institutions can still result in unequal treatment.

The present state of affairs:

While progress is evident, achieving complete parity in loan amounts for Black and White borrowers is a complex and ongoing endeavor. Recent data signals positive trends in narrowing the lending gap, but continued efforts are necessary to eliminate disparities in loan approvals, loan amounts, and interest rates. By enforcing fair lending laws, promoting financial literacy, and advocating for policies that foster equitable lending practices, the financial industry and policymakers can work toward a future where every American, regardless of their racial background, has equal access to the financial resources needed to build a secure and prosperous future.

AI for Money lending decisions:

All throughout the history of banking, it has been the case that human biases are very prevalent and play a role for a myriad of reasons. On those lines, Banking firms might defend the biases by saying these biases based on age, sex, ethnicity, race, and sexual orientation have served them well so far. If such data which is the only kind of data available with banks, were to be used to build AI models to determine who gets a loan then the AI model is not going to overcome the institutional or systemic inequality exercised from the past. This situation truly affects and broadens the wealth gap between the different classes of people in the society or country as a whole.

Building a model normally involves the following steps

1. Data collection – collect the loan approval data set

2. Data cleanup – perform missing value preprocessing

3. Segment the data according to the loan applicants on the basis of age, sex, ethnicity, race, and sexual orientation

4. Balance the data

5. Train the model

6. Test the model on historical data for the non-disenfranchised section of the applicants.

We believe that such models trained on balanced data can accelerate the change from disproportional loan disapprovals for one section of the population i.e. the present state to a very egalitarian means of deciding who gets their loan approved without any biases on the lines of  age, and sex, ethnicity, race and sexual orientation