The economics of discrimination in the granting of credit

Conclusion

As a result of credit supply imperfections and inelastic demand, creditworthy consumers may not fully benefit from accurate credit assessments as is implied by the concept of qualified demand. Yet, despite the existence of house rates and prepackaged credit offers, consumers are still able to shop around for the best terms from creditors who are all competing to make profitable credit extensions. If creditors become less accurate in their credit risk assessment due to ECOL, as the cited empirical studies predict, their opportunity to make profitable credit extensions has diminished. In a competitive credit market, credit availability would decline as creditors would be compelled either to raise rates to compensate for greater default losses and other costs associated with less accurate credit evaluation or to cut those costs by applying more stringent credit standards. Otherwise, credit institutions would be unable to earn a return on invested capital sufficient for the risk involved and the supply of consumer credit funds would diminish. With the existing credit market, creditors may not be as compelled by competition to raise house rates (or able, if such rates are at ceiling levels) or raise credit standards, as is implied by a highly competitive market. However, creditors would still have the same economic incentive to repond to increased costs of doing business in ways which would reduce credit availability to qualified demanders. Furthermore, as credit extensions become less profitable, the economic penalty accorded invidious discrimination is diminished and credit grantors, who are so inclined, are more likely to engage in such practices. Alternatively, if legislators focused upon increasing competition in the consumer credit market, increased credit availability would result. And as this would increase the economic penalty for invidious discrimination, such practices would decline.