Inequality brokered

Public opinion about sexual minorities has improved dramatically in recent years, but Sun and Gao do an analysis showing that discriminatory behavior in lending practices has been ongoing and gone unchecked.

Significance

We propose a method to infer people’s sexual orientation indirectly through gender disclosure of the borrower and coborrower in a mortgage. Furthermore, we examine lending practices toward same-sex borrowers and its spillover effects. We attempt to extend the research on race/gender discrimination by systematically investigating the potentially different lending treatment toward same-sex borrowers. The data reveal that, compared with otherwise similar different-sex applicants, same-sex applicants are 73.12% more likely to be denied, and they tend to be charged up to 0.2% higher fees/interest. Furthermore, neighborhoods’ higher same-sex population density adversely affects both same-sex and different-sex borrowers’ lending experiences. Our method might approximately measure the US homosexual population distribution up to the census tract level annually over decades.

Abstract

Using massive US mortgage lending data, we propose a method to infer a borrower’s sexual orientation indirectly without a self-identification requirement and demonstrate the method’s potential to approximately measure the sexual orientation of the US population at the local level annually over decades. We continue to examine the lending practices to same-sex borrowers and its spillover effects. The persistent results since 1990 reveal that, in contrast with otherwise comparable different-sex loan applicants, the approval rate for same-sex applicants is ∼3–8% lower. Furthermore, conditional on approval, lenders, on average, charge about 0.02–0.2% higher interest to same-sex borrowers, which is equivalent to an annual total of $8.6 million to $86 million in additional interest/fees nationwide. Meanwhile, we find that same-sex borrowers are less risky overall, as they exhibit similar default risk but lower prepayment risk. Finally, we document findings of spillover effects. That is, when the share of a neighborhood’s same-sex population increases, both same-sex and different-sex borrowers seem to experience more unfavorable lending outcomes overall. The findings should raise enough concerns to warrant further investigations.