Stephen L. Ross and John Yinger, The Color of Credit: Mortgage Discrimination, Research Methodology and Fair Lending Enforcement.

Karger, Howard Jacob

Stephen L. Ross and John Yinger, The Color of Credit: Mortgage Discrimination, Research Methodology and Fair Lending Enforcement. Cambridge, MA: MIT Press, 2003. $39.95 hardcover.

This book blends policy analysis and complex technical recommendations relating to the mortgage lending industry. For one, the authors comprehensively examine what has been learned about mortgage-lending discrimination in recent years. They reanalyze existing loan-approval and loan-performance data and devise new tests for detecting discrimination in contemporary mortgage markets. They also review the 1996 Boston Federal Reserve study, examining new evidence that the minority-white loan-approval disparities found represented discrimination rather than variations in underwriting standards justified on business grounds. Ross and Yinger also investigate how the current fair-lending enforcement system overlooks disparate impact discrimination and disparate treatment. Specifically, there are two primary forms of discrimination in mortgage lending: disparate treatment which is the obvious and unequal treatment of applicants; and disparate-impact policies that, while equally applied, systematically disadvantage minorities. Lenders desiring to practice disparate-treatment discrimination but who are prevented from doing so may achieve virtually identical results by using discrimination-based characteristics other than group membership. One example of the latter is credit scoring or other automated underwriting, which can be used to discriminate while appearing to treat all groups equally. Lastly, the authors develop innovative (but highly technical) procedures to rectify weaknesses in the mortgage loan system.

Ross and Yinger note that in 2000, the home ownership rate in the United States was 67.4 percent--an all-time high. However, home ownership were not evenly spread across ethnic groups. The home ownership rate was 73.8% for non-Hispanic whites, 47.2% for blacks, and 45.5% for Hispanics. The authors argue that while this gap may have many causes, one of the likeliest is discrimination in mortgage lending. The authors make a convincing case for discrimination in mortgage lending. Data collected under the Home Mortgage Disclosure Act (HMDA), which records applicant ethnicity and the disposition of the mortgage application, shows that in 2000 black applicants were twice as likely as white applicants to be turned down for a loan, and Hispanic applicants were 41 percent more likely to be turned down. While these disparities in loan approvals do not conclusively prove that blacks and Hispanics face discrimination in mortgage lending (in that they do not take into account possible differences in borrower creditworthiness) the differences are so dramatic that they strongly imply the existence of discrimination.

Ross and Yinger observe that while no one explicitly argues for discrimination in mortgage lending, some maintain that discrimination is a historical relic and no lender could survive in today's competitive market while practicing it. The authors note three reasons why this assumption is naive: (1) the HMDA data shows that ethnically-based loan rejection ratios have remained constant (at about 2.0) throughout the 1990s, (2) the results of the Boston Federal Reserve Bank study found extensive evidence of loan discrimination, and (3) strong evidence points to extensive disparate-impact discrimination.

Ross and Yinger argue that the current fair-lending enforcement system is seriously flawed since it misses cases of discrimination in loan approval that take the form of disparate treatment and is incapable of identifying loan-approval discrimination which takes the form of disparate-impact. They propose three steps for eliminating these flaws. First, fair-lending enforcement agencies should come up with the resources needed to ascertain that they are not missing existing disparate-treatment discrimination. Multivariate regressions should be employed by these agencies to make that determination. Second, these agencies should conduct loan-approval regressions based on applications submitted to a large sample of lenders. These regressions should recognize the complexity of underwriting standards and the possibility that these standards vary systematically across lenders based on their loan portfolios. Third, fair-lending enforcement agencies should implement a performance-based analysis of loan-approval decisions to supplement the multiple regression procedures.

All told, the authors provide an excellent summary of the available economic and statistical evidence for racial discrimination in the mortgage industry. While comprehensive, The Color of Credit is basically a specialized volume for a specialized audience. Although Ross and Yinger target their book at economists and the banking industry, many managers and policymakers most will find large sections of it difficult to read. While the policy sections are well-written and understandable, the full value of the critique and especially the technical recommendations and statistical research, requires a background in economics and knowledge of statistical procedures.

While Ross and Yinger take a technical, almost laborious approach to the subject matter, most social workers or advocates who work with the poor have acquired enough anecdotal evidence to say "So what, I already know that." Nevertheless, it is important for social workers and academics to understand how the process of discrimination is manifested since in contemporary institutional discrimination, the devil is almost always in the details. In short, although the details may be tedious they are nevertheless important since that is the ground where many of the future battles will be fought.

Howard Jacob Karger

University of Houston