What happened

Researchers at UC Berkeley found that both online and face-to-face mortgage lenders charge higher interest rates to Black and Latino borrowers, resulting in significant financial disparities. 

The study focused on 30-year, fixed-rate, single-family residential loans issued from 2008 to 2015 and guaranteed by Fannie Mae and Freddie Mac. 

Black and Latino borrowers pay 5.6 to 8.6 basis points higher interest on purchase loans and 3 basis points more on refinance loans compared to White and Asian borrowers, resulting in USD 250 million to USD 500 million in additional interest payments annually.

Why it happened

The shift from human bias to algorithmic bias in lending discrimination is attributed to the increased use of machine learning algorithms in mortgage lending decisions. 

Intended to create fair systems, these algorithms have a disparate impact on minority borrowers. The pricing disparities result from algorithms that use machine learning to target applicants who might shop around less with higher-priced loans. 

This "algorithmic strategic pricing" may be based on geography or applicant characteristics, potentially exploiting areas with fewer financial services or borrowers with limited access to a range of products.

For lenders, the practice amounts to 11 to 17 percent higher profits on purchase loans to minorities.