Does Your Race Affect Your Loan Application?

By William Bradley

Because I have worked for multiple banks over the course of fifteen years, I was recently asked whether a loan applicant’s race is a factor when their loan application is considered. The person asking pointed to the fact that borrowers tend to be of the same race as their loan officer, and asked if that apparent segregation wasn’t proof of racial bias. In other words, do loan officers favor their own race and discriminate against others? I’d like to answer that question here, because it is important to debunk the myth of racial bias in the loan industry.

The simple answer to the question is no; a loan applicant’s race is not a factor. Residential loans are pretty much automated with Freddie Mac and Fannie Mae; the lender does not even know the race of the applicant, as a result race is never factored into the equation. You either meet the requirements or you don’t. But even when a lender is aware of the race of the borrower, race is still not a factor. The reasons for this are that racism is not only immoral and unethical, but is also unprofitable. Because my salary as a loan officer is commission-based, it is in my own best interest to originate as many loans as possible. It would be self-defeating for me, or any loan officer, to discriminate against an applicant based on their race. I would literally be discriminating against my own profit… And that simply isn’t going to happen.

The truth is that most loan officers, particularly new ones, will work almost any loan. Early in my own career, I would work a loan regardless of whether the applicant’s credit was good or bad, or whether they were low income or well-to-do. But as we loan officers become busier, and build reputations with strong referral bases, we became pickier on what loans we work. We do this, not to discriminate against any particular class of applicant, but rather so that we can manage our time more profitably.

When I evaluate loan applications, it takes the same amount of time to complete a $100,000 loan as it does to finish a $300,000 loan. Because of this, I earn more per hour for the larger loan than I do the smaller; I would have to charge three times the amount on the $100,000 loan to make the same amount of commission as I would on the $300,000 loan. This is an incentive for me to focus on larger loans. I’m going to take this a step farther. Over the years, I have seen that applicants seeking larger loans have higher incomes and are more organized. Because these applicants keep better records,they easily produce the required paperwork. This makes it possible for loans to be processed with little stress for either party, which is another incentive for me to focus on originating larger loans to those with higher incomes. While this is, in effect, a bias in favor of those with higher incomes, it is definitely not racially motivated.

The effect of referrals is another reason experienced loan officers favor large value loans, and applicants with higher incomes. The industry is geared towards production and profit. As a result, loan officers work the loans that will fill their pipeline with referrals.When I first began, my approach of work-any-loan resulted in dozens and dozens of referrals from those I had closed for small loans. While this meant I had plenty of business in my pipeline, it also meant I was bogged down with small loans and hence small commissions. To increase my income, I had to begin favoring larger loans. But my favoring of larger loans was not discriminatory, and it certainly was not racially motivated; it was simply a matter of making my time and career more profitable.

The fact that borrowers tend to be of the same race as their loan officer is not proof of racism. Rather, it is a proof that people choose to borrow money from those they are most comfortable with, and that usually is someone of the same race. When I worked for Experian, I had a job calling on banks and mortgage companies. What I noticed was that, in the area that I worked, a majority of African Americans made loan applications to mortgage companies that were owned by African Americans. I also saw this same trend in the Spanish speaking community as well. Does this mean that Black and Hispanic borrowers were racially biased against White loan officers, or vice versa? No, it means simply that borrowers use lenders that they identify with and feel comfortable with. Borrowers tend to do business with lenders in their own communities, and members of a community are primarily of the same race.

For these reasons, the answer to the question is no; a loan applicant’s race is not a factor as to whether a loan is approved. From my experience, the myth of racial bias in the loan industry is simply that – an untrue myth.

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