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http://www.clev.frb.org/ccca/racelend.htm Last modified 6/28/96
Race appears to play a significant role in determining whether an individual receives mortgage credit only when the individual has a bad credit history or a high ratio of total monthly obligations to monthly income.
That is the conclusion of a comprehensive study of mortgage applications data undertaken by William Hunter, senior vice president and director of research at the Federal Reserve Bank of Chicago, and Mary Beth Walker, an assistant professor of economics in the Policy Research Center of Georgia State University. Hunter summarized the study's findings in a presentation to the Federal Reserve Bank of Cleveland s annual Community Reinvestment Forum.
"For applicants with good credit profiles, race was not a significant factor in the accept/reject decision," Hunter and Walker find. "However, race was very significant for those with bad credit histories, and a bad credit history had the effect of lowering the probability of approval for minorities by an amount appreciably larger than that for whites. Similarly, race became an important factor for high levels of the monthly obligation ratio."
The study was designed to provide a test of the "cultural affinity" hypothesis, which suggests that persistent discrimination in mortgage lending could result from the lack of cultural affinity between white loan officers and minority applicants. The authors examine whether loan officers perceive objective information such as credit history and financial leverage differently for minority applicants than for whites. The findings bear out the hypothesis, they conclude.
"If the majority of loan officers and applicants are white, white loan officers may feel they know more about white applicants than about minorities, and thus they are more likely to acquire additional information about the creditworthiness of white applicants," the authors point out. "On the other hand, we would expect these lenders to rely more heavily on basic objective loan application information in appraising the creditworthiness of minorities."
The study also looked at the "thicker file" phenomenon, which refers to anecdotal observations that accepted white mortgage applicants with marginal credit histories often have thicker loan application files than those of rejected marginal minorities. This has led to the presumption that marginal white applicants receive special counseling. Hunter and Walker report finding no evidence of the thicker file explanation for minority versus white applicants.
Hunter and Walker based their study on 1990 mortgage application data from the Boston area reported under the Home Mortgage Disclosure Act (HMDA) of 1975, and collected by the Federal Reserve Bank of Boston. The data were drawn from a random sample of 3,300 conventional applications made by whites, and 722 conventional applications made by blacks and Hispanics. Full results of the study were published in the form of a Working Paper from the Federal Reserve Bank of Chicago.
For a copy of the Working Paper, number 95-8, contact Shirley Harris at the Federal Reserve Bank of Chicago, 312/322-5810.
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http://www.clev.frb.org/ccca/racelend.htm Last modified 6/28/96
