How does underrepresentation of minorities matter when getting a loan for a home? “Arguably, the residential mortgage market is probably the most important credit market for households in the U.S.,” Finance Professor Ruidi Huang of SMU Cox notes about research, forthcoming in the Journal of Finance. Mortgage lending in the U.S. has traditionally been viewed as a place where hard information dominates. The study suggests that minority loan officers may use more soft information signals about minority borrowers, which makes a difference.

Huang and his coauthors examine how minority representation among mortgage loan officers affects access to residential mortgages. As a snapshot, in the U.S. in 2019 about 39% of the labor force is minorities, Huang notes. The authors estimate that about 15% of [loan officers] are minorities. “That’s a big underrepresentation gap,” Huang says about the research rationale. “We were thinking: what’s going on here? How will this affect outcomes with people’s mortgages?”

A recent focus of research and policy has been to better understand and address the underlying sources. “It’s very well known that racial disparities in economic outcomes are striking in terms of wealth, income, education, and health,” Huang offers. “Research has shown that [these] disparities can be self-reinforcing. For example, if you match minority students to minority teachers and they do better in the classrooms, and similarly, the match of minority patients to minority doctors.”

Massive data

The study utilizes extensive data, including information on the near universe of registered mortgage loan officers and mortgage applications from 2018 to 2019. Huang notes that it was a massive data exercise covering the vast mortgage market universe. One coauthor thought they would not find any results because mortgages are such standardized products, especially after the 2008 financial crisis.

The study showed that minority loan officers are significantly underrepresented compared to their share in the labor force. Interestingly, non-minority loan officers tend to approve more non-minority applicants, while minority loan officers show no such mortgage origination gap. However, the authors suggest that the differences are due to information friction rather than discrimination.

Additionally, the research highlighted the impact of underrepresentation on mortgages. Huang noted that if minority borrowers were matched with minority loan officers, the minority origination gap could be significantly reduced. Minority loan officers also help reduce default rates and increase approval rates for minority borrowers. The research underscores the importance of soft information in the mortgage lending process as well.

Hard information isn’t telling the whole story. The study noted that minority loan officers are better at assessing the creditworthiness of ‘like’ borrowers, especially in cases where hard information such as credit scores is less reliable. This is particularly true for low-income borrowers, and those with lower levels of education, and non-English speakers, especially from smaller banks.

Overall, Huang believes the research could have a large impact. “We provide a simple solution—match more minority loan officers to the minority loan applicants,” he emphasizes.

“The Impact of Minority Representation at Mortgage Lenders,” by Ruidi Huang, Cox School of Business, Southern Methodist University, Scott Frame of Structured Finance Association, Erica Xuewei Jiang of University of Southern California, Yeonjoon Lee of Federal Reserve Bank of Richmond, Will Shuo Liu of City University of Hong Kong, Erik Mayer of University of Wisconsin-Madison, and Adi Sunderam of Harvard Business School, is forthcoming in Journal of Finance.

Summarized by Jennifer Warren.