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Is There Racial Discrimination in Mortgage Lending? Studies Provide Insight, But Debate Continues

Several years of intense study and debate about the causes of racial disparities in home mortgage lending have produced a number of possible explanations. However, a researcher at the Federal Reserve Bank of Cleveland says more study is needed to reach conclusions about the role of race in lending.

Writing in the Bank’s Economic Commentary, economist Stan Longhofer says racial differences in the allocation of mortgage credit may result from market factors that differentiate minority applicants from white applicants (such as lower creditworthiness, higher loan default rates, less wealth, or smaller down payments), or from racial discrimination. The seminal research study on the issue, as well as limited field studies, seem to provide evidence that widespread and systematic racial discrimination is a major factor. However, according to Longhofer, the limitations of researchers’ techniques for detecting such acts, and numerous problems with the data, cause many economists to remain skeptical.

Despite the ongoing controversy, Longhofer says these studies have increased understanding of the role of race in mortgage lending. For example, differences in loan denial rates between racial groups cannot be used as conclusive evidence of widespread discrimination, but when combined with associated loan default rates or other information, they can provide important insight into the possibility of discrimination or other causes for the disparities.

Longhofer says the true value of the debate over the reasons for racial disparities in mortgage lending lies in how it can help us better deal with the issue. He concludes that understanding why differences in lending rates exist is a crucial first step in developing policies that can effectively address this fundamental social problem.

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