Consumers’ race, income affect quality of financial services, treatment by lenders

Unfair, unequal treatment of poor and minority customers of financial institutions is nothing new. Nor are efforts to protect vulnerable populations through changes to the law. New research by University of Michigan finance professor Amiyatosh Purnanandam finds federal regulations aimed at ensuring equal access to credit has an unintended consequence: The quantity of financial products and services has increased but the quality of the offerings are much lower for the lower-income, minority borrowers. The study, co-written by Washington University assistant professor of finance Taylor Begley and accepted for publication in the Journal of Financial Economics, says the quantity-quality tradeoff hasn't been widely studied or understood. To get there, the researchers probed instances of fraud, misselling and poor customer service-their measure of quality-in the consumer credit market. Purnanandam and Begley, who received his doctorate from U-M's Ross School of Business, became aware of problems-and hypothesized who was bearing the brunt of them-after allegations of fraud in the mortgage market in the early 2000s and anecdotal evidence of fraudulent banking practices by Wells Fargo during the early 2010s. "As we went further along with our research, it became clear to us that regulations that reward on the quantity dimension end up disincentivizing banks on the other ones,” Purnanandam said.