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Assessing Fair Lending Risks Using Race/Ethnicity Proxies

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  • Yan Zhang

    (Enterprise Risk Analysis Division, Office of the Comptroller of the Currency, Washington, DC 20219)

Abstract

Fair lending analysis of nonmortgage credit products often involves proxying for race/ethnicity since such information is not required to be reported. Using mortgage data, this paper evaluates a series of proxy approaches (geo, surname, geo-surname, and Bayesian Improved Surname Geocoding (BISG)) as compared with the race/ethnicity reported under the Home Mortgage Disclosure Act (HMDA). The BISG proxy predicts the reported race/ethnicity the best as judged by prediction bias, correlation coefficient, and discriminatory power. In assessing fair lending risks where classification of race/ethnicity is called for, we propose the BISG maximum classification, which produces a more accurate estimation of mortgage pricing disparities than the current practices. The above conclusions withhold various robustness tests. Additional analysis is performed to assess the proxies on nonmortgage credits by leveraging consumer credit bureau data.

Suggested Citation

  • Yan Zhang, 2018. "Assessing Fair Lending Risks Using Race/Ethnicity Proxies," Management Science, INFORMS, vol. 64(1), pages 178-197, January.
    • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:1:p:178-197
    DOI: 10.1287/mnsc.2016.2579
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    References listed on IDEAS

    as
    1. Yan Zhang, 2013. "Fair Lending Analysis of Mortgage Pricing: Does Underwriting Matter?," The Journal of Real Estate Finance and Economics, Springer, vol. 46(1), pages 131-151, January.
    2. Black, Harold A. & Boehm, Thomas P. & DeGennaro, Ramon P., 2003. "Is there discrimination in mortgage pricing? The case of overages," Journal of Banking & Finance, Elsevier, vol. 27(6), pages 1139-1165, June.
    3. Munnell, Alicia H. & Geoffrey M. B. Tootell & Lynn E. Browne & James McEneaney, 1996. "Mortgage Lending in Boston: Interpreting HMDA Data," American Economic Review, American Economic Association, vol. 86(1), pages 25-53, March.
    4. Marsha J. Courchane, 2007. "The Pricing of Home Mortgage Loans to Minority Borrowers: How Much of the APR Differential Can We Explain?," Journal of Real Estate Research, American Real Estate Society, vol. 29(4), pages 399-440.
    5. Ethan Cohen-Cole, 2011. "Credit Card Redlining," The Review of Economics and Statistics, MIT Press, vol. 93(2), pages 700-713, May.
    6. Bocian, Debbie Gruenstein & Ernst, Keith S. & Li, Wei, 2008. "Race, ethnicity and subprime home loan pricing," Journal of Economics and Business, Elsevier, vol. 60(1-2), pages 110-124.
    7. Thomas Boehm & Paul Thistle & Alan Schlottmann, 2006. "Rates and race: An analysis of racial disparities in mortgage rates," Housing Policy Debate, Taylor & Francis Journals, vol. 17(1), pages 109-149.
    8. Marsha Courchane & David Nickerson, 1997. "Discrimination Resulting from Overage Practices," Journal of Financial Services Research, Springer;Western Finance Association, vol. 11(1), pages 133-151, February.
    9. Crawford, Gordon W & Rosenblatt, Eric, 1999. "Differences in the Cost of Mortgage Credit Implications for Discrimination," The Journal of Real Estate Finance and Economics, Springer, vol. 19(2), pages 147-159, September.
    10. Paul Gustafson & Nhu D. Le, 2002. "Comparing the Effects of Continuous and Discrete Covariate Mismeasurement, with Emphasis on the Dichotomization of Mismeasured Predictors," Biometrics, The International Biometric Society, vol. 58(4), pages 878-887, December.
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