Color and Credit: Race, Regulation, and the Quality of Financial Services

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March 2017

Taylor A. Begley, Washington University in St. Louis and Amiyatosh Purnanandam, University of Michigan

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The incidence of mis-selling, fraud, and poor customer service by retail banks is significantly higher in markets with lower income and educational attainment. Further, areas with a higher share of minority population experience significantly worse outcomes even after controlling for factors such as income, education, and house price changes. Regulations aimed at improving access to credit to such areas are partly responsible for these findings. Specifically, low-to-moderate-income (LMI) areas targeted by the Community Reinvestment Act have significantly worse outcomes and this effect is magnified further for LMI areas with high-minority population. The results highlight an unintended adverse consequence of such quantity-focused regulations on the quality of credit to poor and minority customers.