New frontier of bigotry: algorithms

Even machines are discriminating against black and Latino homebuyers.

When will discrimination die?

I keep hoping there will come a time when the color of my skin doesn’t dictate how I’m treated — especially as I shop for loans.

But that day has yet to come. Once when I was buying a car, I asked the salesman to give me a quote on the interest rate were I to take the dealer’s financing.

At the time, the average rate for a used auto loan was about 5 percent. I had good income and exceptional credit scores. After pulling my credit report, the salesman said he could offer me 10 percent.

“That’s awfully high,” I said. (The salesman didn’t know I had already been pre-approved through my credit union for a rate of about 4 percent.)

I suspected what was happening. I had reported on class-action lawsuits brought against auto-finance firms alleging they allowed dealers to charge interest-rate “markups” to black and Latino customers more frequently, and at significantly higher rates, than similarly situated white customers.

I kept pressing the salesman about what I felt was an interest-rate overcharge.

“I guess you have some blemishes on your credit,” he said.

Oh, no, he didn’t.

It took an amazing amount of self-control on my part not to cuss that man out. I was sure he was racially profiling me. It’s happened many times before. He was counting on two things: I was unaware of my good credit standing, and I might not be inclined to shop around for a better rate. I only buy cars with cash now.

There is still a two-tier pricing system that penalizes blacks and Latinos who are creditworthy of better rates.

It happens with auto loans as well as mortgages.

But what if you took the human element out? Surely, minorities would get as good a deal as other borrowers with similar credit histories with a supposedly race-neutral automated application system, right?

No. Even with automation, mortgage bias exists, according to recent findings by researchers at University of California, Berkeley.

The Berkeley study looked at 30-year, fixed-rate, single-family residential loans issued from 2008 to 2015 and guaranteed by Fannie Mae and Freddie Mac. It found that — whether they apply for a mortgage loan face-to-face or online — blacks and Latinos are charged 5.6 to 8.6 basis points higher than white borrowers with comparable credit history. The extra mortgage interest is costing minority borrowers $250,000 to $500,000 more per year.

“Algorithms have not removed discrimination, but may have shifted the mode,” the researchers wrote.

When refinancing, minorities pay 1 to 3 basis points more. Interest-rate discrimination can boost lender profits 11 percent to 17 percent per loan.

So, how can a machine discriminate?

It’s all about the formulas fed into the algorithms, the researchers conclude.

“With algorithmic credit scoring, the nature of discrimination changes from being primarily concerned with human biases … to being primarily concerned with illegitimate applications of statistical discrimination,” the researchers wrote.

By law, lenders can’t discriminate based on race. They can however price loans based on credit risk. With an online application, the algorithms may be categorizing borrowers based on behavioral ethnic or demographics profiling, the researchers said.

“Even if the people writing the algorithms intend to create a fair system, their programming is having a disparate impact on minority borrowers,” said study co-author Adair Morse, a finance professor at UC Berkeley’s Haas School of Business.

Here’s a key point the study made: Statistical discrimination could be occurring because minority borrowers are less likely to rate shop.

However, it’s not just minorities who don’t shop around for mortgage rates. Nearly half of consumers don’t comparison shop for better rates before taking out a mortgage to buy or refinance a home, according to a study earlier this year by Freddie Mac.

On average, borrowers could save almost $1,500 over the life of the loan by getting one additional rate quote and about $3,000 for five quotes, Freddie Mac said. For minorities who are up-charged, the dollar savings would be even greater.

By the way, the scoring models are better now at allowing consumers to rate-shop for a single loan. For its newest versions, FICO says all inquiries done within a 45-day window for auto, mortgage or student loans are treated as a single credit inquiry.

It’s also easier than ever to check your credit score. If you have a credit card, your issuer likely offers a free credit score. If not, you can get a free score from Discover at creditscorecard.com. You can also get free scores from these two sites: creditkarma.com and freecreditscore.com.

Since bias still exists, decrease the likelihood that you’ll be discriminated against by shopping around and being better informed about your creditworthiness.

— Washington Post Writers Group

Talk to us

> Give us your news tips.

> Send us a letter to the editor.

> More Herald contact information.

More in Business

Reed Macdonald, magniX CEO. Photo: magniX
Everett-based magniX appoints longtime aerospace exec as new CEO

Reed Macdonald will take the helm at a pivotal time for the company that builds electric motors for airplanes.

People walk along a newly constructed bridge at the Big Four Ice Caves hike along the Mountain Loop Highway in Snohomish County, Washington on Wednesday, July 19, 2023. (Annie Barker / The Herald)
Check out the best tourist attractions in Snohomish County

Here’s a taste of what to do and see in Snohomish County, from shopping to sky diving.

People walk out of the Columbia Clearance Store at Seattle Premium Outlets on Thursday, April 25, 2024 in Quil Ceda Village, Washington. (Olivia Vanni / The Herald)
Head to Tulalip for retail recreation at Seattle Premium Outlets

The outlet mall has over 130 shops. You might even bring home a furry friend.

Brandon Baker, deputy director for the Port of Edmonds, shows off the port's new logo. Credit: Port of Edmonds
A new logo sets sail for the Port of Edmonds

Port officials say after 30 years it was time for a new look

Penny Clark, owner of Travel Time of Everett Inc., at her home office on Tuesday, April 23, 2024 in Arlington, Washington. (Olivia Vanni / The Herald)
In a changing industry, travel agents ‘so busy’ navigating modern travel

While online travel tools are everywhere, travel advisers still prove useful — and popular, says Penny Clark, of Travel Time in Arlington.

Travis Furlanic shows the fluorescent properties of sulfur tuft mushrooms during a Whidbey Wild Mushroom Tour at Tilth Farmers Market on Saturday, April 27, 2024 in Langley, Washington. (Annie Barker / The Herald)
On Whidbey Island, local fungi forager offers educational mushroom tours

Every spring and fall, Travis Furlanic guides groups through county parks. His priority, he said, is education.

ZeroAvia founder and CEO Val Mifthakof, left, shows Gov. Jay Inslee a hydrogen-powered motor during an event at ZeroAvia’s new Everett facility on Wednesday, April 24, 2024, near Paine Field in Everett, Washington. (Ryan Berry / The Herald)
ZeroAvia’s new Everett center ‘a huge step in decarbonizing’ aviation

The British-American company, which is developing hydrogen-electric powered aircraft, expects one day to employ hundreds at the site.

Allan and Frances Peterson, a woodworker and artist respectively, stand in the door of the old horse stable they turned into Milkwood on Sunday, March 31, 2024, in Index, Washington. (Ryan Berry / The Herald)
Old horse stall in Index is mini art gallery in the boonies

Frances and Allan Peterson showcase their art. And where else you can buy a souvenir Index pillow or dish towel?

Everett
Red Robin to pay $600K for harassment at Everett location

A consent decree approved Friday settles sexual harassment and retaliation claims by four victims against the restaurant chain.

magniX employees and staff have moved into the company's new 40,000 square foot office on Seaway Boulevard on Monday, Jan. 18, 2020 in Everett, Washington. magniX consolidated all of its Australia and Redmond operations under one roof to be home to the global headquarters, engineering, manufacturing and testing of its electric propulsion systems.  (Andy Bronson / The Herald)
Harbour Air plans to buy 50 electric motors from Everett company magniX

One of the largest seaplane airlines in the world plans to retrofit its fleet with the Everett-built electric propulsion system.

Simreet Dhaliwal speaks after winning during the 2024 Snohomish County Emerging Leaders Awards Presentation on Wednesday, April 17, 2024, in Everett, Washington. (Ryan Berry / The Herald)
Simreet Dhaliwal wins The Herald’s 2024 Emerging Leaders Award

Dhaliwal, an economic development and tourism specialist, was one of 12 finalists for the award celebrating young leaders in Snohomish County.

Lynnwood
New Jersey company acquires Lynnwood Land Rover dealership

Land Rover Seattle, now Land Rover Lynnwood, has been purchased by Holman, a 100-year-old company.

Support local journalism

If you value local news, make a gift now to support the trusted journalism you get in The Daily Herald. Donations processed in this system are not tax deductible.