A.I. Could Be The New Play To Increase Black Homeownership
AI algorithms may deserve their reputation for bias, but in the case of home loans, Black people get lower rejection rates when applying online than in person. Photo: National Cancer Institute on Unsplash
By CultureBanx Team
- Algorithms for online mortgage lending can reduce discrimination against Black applicants
- In-person mortgage lenders typically reject Black applicants at a 6% higher rate
Artificial Intelligence and its inherent bias may not be as judgmental as previously thought, at least in the case of home loans. It appears the use of algorithms for online mortgage lending can reduce discrimination against certain groups, including Black applicants, according to a recent study from the National Bureau of Economic Research. This could end up becoming the main tool in closing the racial wealth gap, especially as banks start using AI for lending decisions.
Why This Matters: The study found that in-person mortgage lenders typically reject minority applicants at a rate 6% higher than those with comparable economic backgrounds. However, when the application was online and involved an algorithm to make the decision, the acceptance and rejection rates were the same. Even with AI helping minority borrowers get approval online, they’re still paying more under algorithmic lending. In 2017, $2.25 trillion of the $13 trillion of outstanding household debt in the U.S. was associated with minority households.
In 2017, $2.25 trillion of the $13 trillion of outstanding household debt in the U.S. was associated with minority households
Simply stated, what makes AI-based lending much more altruistic when it comes to home loans is that they don’t want to leave any money behind. The study’s researchers noted that “if lenders were to discriminate in the accept/reject decision, it would imply that money is left on the table. …(s)uch unprofitable discrimination must reflect a human bias by loan officers.”
Disparities in homeownership rates are cited as the leading cause in the racial wealth gap. There are several studies which indicate the median white family holds more than ten times the wealth of the median African American family. McKinsey projected that closing the racial wealth gap could net the U.S. economy between $1.1 trillion and $1.5 trillion by 2028.
The U.S. Census Bureau reported that Black homeownership dropped to its lowest level at 40% and has been steadily declining since its 2004 peak. It is possible that AI could help reverse this trend as researchers calculate that, from 2009 to 2015, 0.74 to 1.3 million minority applicants were rejected, who would have been accepted were it not for discrimination by loan officers.
Situational Awareness: The growing use of algorithms in financial services can produce results that are positive, negative or simply unpredictable. It’s important to note that 45% of the country’s largest mortgage lenders now offer online or app-based loan origination, as FinTech looks to play a major role in reducing bias in homeownership and the home lending market.