Discrimination in mortgage loans can take many different forms. It can be overt in the form of giving differing conditions to members of protected classes or refusing to grant loans to members of particular groups. It can also be subtle, discernible only through a comparison of similar candidates with disparate results. Features like ethnicity, faith, sex, or family situation shouldn't be used by lenders to determine a candidate's creditworthiness. But they continue to do so.
While overt discrimination is typically quickly detected and removed by regulatory inspectors, disparate impact and uneven treatment are more challenging to eradicate. When a policy that is impartially implemented is really designed to harm a protected group of individuals, this is known as a disparate effect.
A lender that treats some customer types less favorably than others is said to be practicing differential treatment. These behaviors could be subtle, like a loan officer giving a loan package preference to an applicant with the last name Smith rather than Gonzales.
To investigate discrimination in mortgage lending, it's critical to account for reasonable differences in real underwriting requirements across lenders. Regression models can be pooled for this purpose, or unique regressions for each lender can be estimated. The latter method offers the most accurate estimate of difference treatment, but it runs the danger of ignoring disparate impacts, particularly if sampled lenders consistently apply incorrect underwriting rules.
By utilizing data from the NFHA test report form regarding the inquiries lenders made of testers, the Urban Institute reanalysis accounts for endogenous variables. Lenders may utilize some of these inquiries, such as those concerning an applicant's income and obligations, to confirm whether the applicant can afford to return the loan. Therefore, in a single denial equation, removing these variables could lead to an overstatement of the minority-status coefficient.
However, some of the variations in underwriting standards noted in the Boston Fed Study might not be the result of legal discrimination but rather the result of lender-specific business requirements. This possibility does not include disparate impact; nonetheless, it may result in a minority status-dependent variation in the "meets guidelines" variable. Including this endogenous variable may cause the minority-status coefficient to be overstated.
Future studies on prejudice in mortgage financing should place a strong emphasis on thoroughly examining these problems. The various forms of discrimination that may occur during the pre-application phase should also be investigated, as should the ways in which the circumstances of applicants affect the actions of lenders.
Redlining, as the term implies, is the practice of mortgage lenders in the 1930s of marking neighborhoods on maps with red lines that they would not invest in because of the racial composition of certain neighborhoods. This policy made it harder for black families to become homeowners and accumulate money, thereby exacerbating racial segregation in American homes.
The Community Reinvestment Act of 1974 outlawed redlining, but prejudice in various forms has persisted, denying black and Hispanic families access to opportunities, housing, and financial services. Predatory lending, disproportionate denials of mortgage loans and other credit products, and withholding of other vital community infrastructure, such as grocery stores and hospitals, are just a few examples of the discriminatory practices that exist today (U.S. Department of Justice, 2023).
The government may prosecute lenders who engage in these kinds of activities for breaking the Fair Housing Act. Customers can register a complaint with the Fair Housing Center or the CFPB if they think they were the victim of redlining.
