Racial differences in the ability to acquire a loan are sometimes pointed to as evidence of White privilege. These differences are said to lead to racial disparities in home ownership rates and entrepreneurship which in turn have a variety of long-term economic and social consequences. Though this story is often repeated, it is not justified by the relevant empirical evidence.

The idea that Whites get loans easily due to White privilege is not consistent with the fact that Asians can get loans just as easily as Whites can.

Desilver and Bialik (2017)

Given this pattern, the most obvious cause of differences in loan approval is racial differences in income. However, critics have pointed out that Whites are more likely than Blacks to get loans approved when comparing people of equal incomes.

This may sound compelling, but Blacks and Whites with equal incomes do not have the same spending behavior. Borgo (2013) looked at data on 25,820 American households and found that Black homes had lower saving rates than White homes even after controlling for differences in income, age, family size, education, and marital status. Thus, it makes sense for loan companies to prefer White customers over Black ones even if they have the same incomes.

These differences in spending behavior explain why Blacks and Whites with equal incomes do not have the same credit scores. As reported by The Washington Post:

“The study found that whites earning less than $25,000 had better credit records as a group than African Americans earning between $65,000 and $75,000. Overall, 48 percent of blacks and 27 percent of whites had bad credit ratings, as defined by Freddie Mac in this study.” – Loose, The Washington Post

The central role of credit scores in racial loan disparities is highlighted by a survey which had lenders explain why they denied a large sample of loan applications. This research found found that an applicant’s debt-to-income ratio was the top reason non-Blacks were denied loans whereas credit history was the most frequently cited reason for Black applicants.

Desilver and Bialik (2017)

Some studies find that racial differences in loan acceptance persist even after adjusting for credit score differences. This is true, but it is also true that the credit scoring system doesn’t work equally well for Blacks and Whites. According to a report given to congress by the federal reserve on how well loan performance is predicted by credit scores:

“Consistently, across all three credit scores and all five performance measures, blacks, single individuals, individuals residing in lower-income or predominantly minority census tracts show consistently higher incidences of bad performance than would be predicted by the credit scores. Similarly, Asians, married individuals, foreign-born (particularly, recent immigrants), and those residing in higher-income census tracts consistently perform better than predicted by their credit scores”

In other words, if you give out a loan to a Black and a loan to a White with equal credit scores, you are more likely to get your money back from the White.

This bias was shown to be strongest among those with low credit scores and to be much weaker among those with good credit scores. There is not much of a difference in the riskiness of giving loans to Blacks and Whites with good credit scores, but Blacks with poor credit scores are significantly riskier than Whites with poor credit scores to loan money to.

Given this, it should be no surprise that a study by the Chicago federal reserve found no racial bias in loan approval rates among those with a good credit score but a significant bias in favor of whites among those with a bad credit score. Loan agencies are acting exactly as we would expect them to if they were economically rational.

Perhaps the strongest evidence that racism is not the cause of differences in loan approval rates comes from a study of several thousand banks which found that Black-owned banks discriminated far more harshly against Blacks than did White-owned banks.

Specifically, at a White owned bank a Black person was found to have a 78% higher chance of rejection for a loan compared to a White person. At a Black-owned bank, this figure rose to 179%, an increase of 101%.

Thus, racial differences in the riskiness of loans can account for why Blacks have a harder time getting loans than White people do, and the relevant empirical evidence does not justify the belief that racism on the part of loaners is a relevant factor.