Evidence on Discrimination in Mortgage Lending

TLDR

Controversy over minority discrimination in mortgage lending stems largely from confusion over how discrimination is defined, and higher default rates among minorities are irrelevant to race coefficient interpretation. The study calls for further research into how applicant race relates to delinquencies, defaults, and losses. The authors use legal‑definition‑based analyses of loan denial rates, exemplified by the Federal Reserve Bank of Boston study, to test for lender discrimination. The Federal Reserve Bank of Boston study shows clear evidence that lenders discriminate.

Abstract

Much of the controversy about whether mortgage lenders discriminate against minorities can be explained in terms of the confusion about how to define discrimination. Based on the legal definition, careful studies of loan denial rates, such as that done by the Federal Reserve Bank of Boston, represent an appropriate method for testing for discrimination by lenders. Based on that study, it is quite clear that lenders discriminate. The fact that minorities have higher default rates on average than whites is irrelevant to the interpretation of the race coefficient in such models. Nonetheless, more research on and discussion about the relationship between the race of the applicant and delinquencies, defaults, and losses would be desirable.