Stephen L. Ross and John Yinger, the Color of Credit: Mortgage Discrimination, Research Methodology and Fair Lending Enforcement

Article excerpt

Stephen L. Ross and John Yinger, The Color of Credit: Mortgage Discrimination, Research Methodology and Fair Lending Enforcement. Cambridge, MA: MIT Press, 2003. $39.95 hardcover.

This book blends policy analysis and complex technical recommendations relating to the mortgage lending industry. For one, the authors comprehensively examine what has been learned about mortgage-lending discrimination in recent years. They reanalyze existing loan-approval and loan-performance data and devise new tests for detecting discrimination in contemporary mortgage markets. They also review the 1996 Boston Federal Reserve study, examining new evidence that the minority-white loan-approval disparities found represented discrimination rather than variations in underwriting standards justified on business grounds. Ross and Yinger also investigate how the current fair-lending enforcement system overlooks disparate impact discrimination and disparate treatment. Specifically, there are two primary forms of discrimination in mortgage lending: disparate treatment which is the obvious and unequal treatment of applicants; and disparate-impact policies that, while equally applied, systematically disadvantage minorities. Lenders desiring to practice disparate-treatment discrimination but who are prevented from doing so may achieve virtually identical results by using discrimination-based characteristics other than group membership. One example of the latter is credit scoring or other automated underwriting, which can be used to discriminate while appearing to treat all groups equally. Lastly, the authors develop innovative (but highly technical) procedures to rectify weaknesses in the mortgage loan system.

Ross and Yinger note that in 2000, the home ownership rate in the United States was 67.4 percent--an all-time high. However, home ownership were not evenly spread across ethnic groups. The home ownership rate was 73.8% for non-Hispanic whites, 47.2% for blacks, and 45.5% for Hispanics. The authors argue that while this gap may have many causes, one of the likeliest is discrimination in mortgage lending. The authors make a convincing case for discrimination in mortgage lending. Data collected under the Home Mortgage Disclosure Act (HMDA), which records applicant ethnicity and the disposition of the mortgage application, shows that in 2000 black applicants were twice as likely as white applicants to be turned down for a loan, and Hispanic applicants were 41 percent more likely to be turned down. While these disparities in loan approvals do not conclusively prove that blacks and Hispanics face discrimination in mortgage lending (in that they do not take into account possible differences in borrower creditworthiness) the differences are so dramatic that they strongly imply the existence of discrimination.

Ross and Yinger observe that while no one explicitly argues for discrimination in mortgage lending, some maintain that discrimination is a historical relic and no lender could survive in today's competitive market while practicing it. …