Defaults To Test for Mortgage Lending Discrimination

This critique examines the proposal that loan defaults can be used to test for the existence of discrimination in the mortgage approval process. The critique then shows that a test based on loan defaults is biased against finding evidence of dis-crimination and that some of these key biases do not arise in a direct test using loan approval data. Finally, the critique examines and rejects a similar proposal to use information on lender loss upon default to test for differential treatment during the foreclosure process. Recent studies by Berkovec, Canner, Gabriel, and Hannan (BCGH) (1994, 1995) have led to renewed debate concerning discrimination in mortgage lending. BCGH follow a default approach to test for discrimination, arguing that if minority borrowers are held to higher standards than nonminority borrowers, only high-quality minority loans will be approved and minority loans will have lower default rates than nonminority loans. They find that for African Americans the theoretical prediction is not supported by empirical evidence; rather, African-American borrowers have higher default rates