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C H A P T E R T W E L V E Discrimination in Mortgage Lending 12.1 INTRODUCTION Mortgage market discrimination has been categorized as blatant treatment, differential treatment, and adverse impact. Blatant treatment involves explicit refusal to lend or explicit lending policies that consider prohibited demographic | A Companion to Urban Economics Edited by Richard J. Arnott Daniel P. McMillen Copyright 2006 by Blackwell Publishing Ltd CHAPTER TWELVE Discrimination in Mortgage Lending Anthony M. Yezer 12.1 Introduction Mortgage market discrimination has been categorized as blatant treatment differential treatment and adverse impact. Blatant treatment involves explicit refusal to lend or explicit lending policies that consider prohibited demographic characteristics race sex and ethnicity. Differential treatment discrimination arises when lending criteria are applied differently based on prohibited characteristics even though there is no explicit policy of discrimination. Such differential treatment because it is implicit is inferred by statistical analysis of lending outcomes. Adverse impact discrimination arises when lenders use lending criteria that are significantly correlated with prohibited characteristics when alternative criteria could be used. Of course demographic characteristics are correlated with many economic characteristics such as income and wealth which are good predictors of creditworthiness. Lenders are only allowed to use these factors if they can show that alternative economic indicators not correlated with minority status are not sufficient to predict credit risk in mortgage lending. The concept of statistical discrimination is closely related to adverse impact. Statistical discrimination arises when lenders use readily available characteristics that are correlated with minority status in the underwriting process rather than using alternative information that might be more costly to collect. Mortgage markets have several distinctive characteristics that must be understood before considering the possibility that there is discrimination against any particular category of mortgage applicant. The first task of this essay will be to review these distinct features. Armed with an understanding of the process of application loan taking underwriting loan approval .
