HMDA Disparities or Discrimination?

American Banker, September 27, 2005 | Go to article overview

HMDA Disparities or Discrimination?


In their analysis of the new HMDA data ("New Information Reported Under HMDA and Its Application in Fair-Lending Enforcement," Federal Reserve Bulletin, summer 2005), Federal Reserve Board researchers document substantial racial disparities in the cost of credit.

But after laying out the basic patterns, the paper quickly backtracks in efforts to explain away the uncomfortable findings.

A basic message that comes through is the possibility, if not likelihood, that with sufficient data on the right "objective" measures the racial disparity would disappear. And if this were the case, according to this perspective, the problem of racial discrimination would virtually disappear, except perhaps within a few selected institutions.

The notion that the presence or absence of a statistically significant race coefficient in a multivariate model is the touchstone for determining whether racial discrimination is present, however, is wrongheaded and dangerous. (I'm reminded of the statistical joke that if you torture the data long enough, eventually they will surrender.)

Though the race effect has probably not disappeared (the National Community Reinvestment Coalition found race statistically significant in previous lending studies, even after controlling for credit rating and housing characteristics), its disappearance would not be the end of the discussion. It would simply be the beginning of a much more complex discussion about the continuing role of race in credit markets and American society in general.

But if controlling for income, wealth, property characteristics, credit rating, type of loan, loan-to-value ratio, type of lender, and the rest resulted in a race coefficient that was zero or not statistically significant, this raises many questions and answers few.

If the race effect disappeared in this manner, it would mean that the large unadjusted disparities could be "explained" by the fact that racial minorities earn less money, accumulate less wealth, purchase homes in worse repair, have lower reported (but often inaccurate) credit ratings, need to borrow a higher share of the cost of their housing, and are limited to fewer but higher priced lenders.

All of this raises the question of why.

Part of the answer, no doubt, is that minorities on average attend inferior schools, which reduces their ability to compete in the labor market, undercutting their income and potential wealth accumulation.

Employers still systematically discriminate (as the economists Marianne Bertrand and Sendhil Mullainathan reported in "Are Emily and Greg More Employable than Lakisha and Jamal? A Field Experiment on Labor Market Discrimination," published last year in The American Economic Review). Such discrimination in education and employment no doubt contributes to the fact that minorities generally have higher loan-to-value ratios and lower credit scores.

Discrimination in the nation's housing markets continues to limit choices for racial minorities and the appreciation in the value of the homes they are able to buy.

Though discrimination may have been reduced in the 1990s, the latest HUD/Urban Institute housing-discrimination study found that African-Americans and Latinos encounter disparate treatment in one out of every five initial visits to a rental or sales agent. Historical and ongoing segregation continues to restrict options for racial minorities on a range of fronts, as Douglas S. Massey and Nancy A.

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