If those people at said particular location _actually_ does not have higher risk, but is only higher due to their location association (e.g., their job is secure, etc), then an enterprising lender could find that out, and thus get the business from those people at a lower interest rate. This would be a form of arbitrage - they will steal marketshare from another lender who is unwilling to lend at the lower rate.
If members of a certain race consistently don’t pay debts in a way that is statistically significant, then it would be prudent to lend to them at higher interest rates due to perceived risk. Sounds racist, but reality has no obligation to conform to our ideas of racial equality. Races can develop habits and cultures amongst themselves that produce certain emergent behaviors. I think arguing against this just makes you seem naive.
In the above example, you are more than welcome to ignore race and lend money to everyone at the same interest rate regardless of race, but I predict you will see worse returns. Reality is what still exists even if you close your eyes and ignore the data.
And suppose a location has been found with above average risk. To compensate, we increase interest rates in that area... making it more likely that people are unable to repay their loans, making the area more risky, increasing interest rates... the risk estimation algorithm essentially becomes part of enforcing and maintaining existing economic inequality.