Qualifying for a loan in today's tight credit market is hard. But add race to the mix, and a borrower's odds can go from bad to worse, a new report suggests.
In a study of loans created on Prosper.com, a peer-to-peer lending website where applicants are encouraged to include a personal photo, researchers found that black borrowers are 25 to 35 percent less likely to receive funding than a white borrower with similar credit.
The report, entitled "What's in a Picture? Evidence of Discrimination From Prosper.com," studied 110,000 loan applications from the popular lending website created between June 2006 and May 2007.
"By far the biggest factor was race," said Devin Pope, co-author and assistant professor at the University of Chicago Booth School of Business. Of the 110,000 loans studied, about 5,000 were home finance or repair related.
Part of the reason for the stark discrepancy, Pope told AOL Real Estate, is that the online lending market is less regulated than its brick and mortar counterpart, where discriminatory practices are more easily identified.
But that doesn't preclude racial discrimination from real-world borrowing entirely. In fact, a closer probe of mortgage lending practices during the housing run-up revealed that African-American and Latino borrowers were more frequently offered high-interest, sub-prime mortgages than their white counterparts, even when they qualified for better terms.
The investigation led to a historic settlement in which Bank of America agreed to pay $335 million to settle widespread claims of discriminatory lending at its Countrywide unit. The Department of Justice cited over 200,000 cases in which black and Latino borrowers were charged higher fees and interest rates without regard for their credit profile.
In 2006, at the height of risky home-loan servicing, 52 percent of loans to African American families were subprime; for Latino families, more than 40 percent were subprime, according to the Center for Responsible Lending, a consumer watchdog group. By the time the housing market rights itself, some 40 to 50 percent of subprime loans will have failed, said Kathleen Day, a spokesperson for the CRL.
While race was the largest factor in determining loan funding, the study also detected other biases on the peer-to-peer lending site. Older and overweight applicants were 5 to 10 percent less likely to get funding, while people who looked unhappy in their photos were 10 to 15 percent less likely to close on a deal. (Pope admits that the sample size for "unhappy" applicants was considerably smaller.)
Alternatively, female applicants were actually 10 to 15 percent more likely to receive funding for their projects.
UPDATE: While the data for the study was captured between June 2006 and May 2007, Prosper.com has overhauled its lending model since the survey was conducted, according to spokesperson Laurie Azzano. The platform now uses blind bidding, which no longer allows users to post personal photos, she said.
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