For women and people of color, getting a loan from a bank can be an especially difficult proposition. That’s why many hope that the growth of alternative lenders will usher in a different, more equitable kind of credit system.
But a recent paper suggests that these new lenders may be in danger of repeating some of the same old mistakes.
The prevalence of discrimination in lending of all kinds is well documented. “Black testers, as opposed to white testers, are less likely to receive a quote for a loan, are often quoted higher interest rates, are given less coaching from loan officers, and loan officers are less likely to look for factors to justify accepting their applications,” writes Sarah Harkness, a sociology professor at the University of Iowa and author of the paper. She says that when assessing loan candidates lenders make judgments about a potential borrower’s reliability. Some of this judgment comes from hard data, such as income or credit score, but some of it can come from bias and stereotyping, Harkness theorizes. And that, in turn, leads to systemic discrimination that prevents millions of families from building wealth.
Harkness conducted a survey of users on a peer-to-peer lending site who all had the same credit ranking (a “B,” the second-highest level by site standards). She then assigned each applicant lender-facing avatars that differed by gender and race, and loan requests that totaled less than $10,000.
She finds that lenders consider black women and white men to be the most fundable. White women were less likely to receive funding than either black women or white men, and black men were the least likely of any group to obtain loan approval. While she stops short of assigning motives, Harkness does highlight research that may explain why potential borrowers are ranked in this order of preference. For example, recent studies have suggested that black women tend not to fit neatly into prototypical stereotypes for either gender or race. They are assigned traits such as assertiveness and self-confidence, which are often associated with men. These traits may also make lenders believe that a borrower is more likely to repay their loans. Black women are also often seen as more competent, self-reliant, and high-achieving than black men. This, may help explain why lenders in the study were more willing to give them access to capital despite their status as a double minority group.