Credit Changes Could Help Black, Latino Borrowers

A change in the way creditworthiness is determined would increase home-buying opportunities for Black and Latino homebuyers, according to new research released at an event held by National Association Realtors.

The research, authored by Ann B. Shnare and Vanessa Gail Perry, examines how reforms to current credit bureau data and scoring models can provide a more wholistic view of a borrower’s credit performance – and increase buying opportunities for Black and Latino borrowers.

“Minorities are far more likely to be ‘unscoreable’ or have relatively weak credit scores using traditional credit bureau data,” Dr. Schnare said. “Incorporating additional data into the credit evaluation process can open doors for many deserving borrowers and boost minority homeownership rates.”

A 2020 report on homeownership by race found:

  • Homeownership among non-Hispanic White Americans was more than 71 percent from 2016 to 2019.
  • It was 41 percent for African Americans.
  • It was 45 percent for Hispanic Americans.
  • For Asian Americans, the rate was more than 53 percent.

Under the new credit roposal, each form of alternative data would be evaluated using a newly devised five-factor “SCALE” framework that incorporates important considerations in the data’s predictive power. These include:

  • Societal Values: Does it respect social and ethical norms like right to privacy?
  • Contextual Integrity: Regardless of predictive value, is it relevant to mortgages?
  • Accuracy: Does the data accurately reflect the household’s financial situation?
  • Legality: Would the use of the data have a disparate impact on protected classes?
  • Expanded Opportunity: Would the use of the data increase the number of qualified borrowers?

“The rise of big data greatly expands the options for credit scoring,” Dr. Perry noted. “However, predictability is not enough to justify the use of certain kinds of data. Their use must also be consistent with broader social and ethical values.”