Using High-Frequency Evaluations to Estimate Disparate Treatment: Evidence from Mortgage Loan Officers

Abstract

We develop modified benchmarking tests for disparate treatment that we apply to 25 years of mortgage lending. Our tests limit the scope for omitted variables by linking high-frequency mortgage decisions to an economic mechanism—loan officers have volume quotas that constrain subjectivity on loans processed at month-end. We estimate that these quotas reduce the unexplained Black approval gap of 7 ppt by at least half. Applicant characteristics are time-invariant within-month and measures of credit risk do not explain racial differences in approvals. The within-month approval gap is smaller for shadow banks, but not for FinTechs or banks in concentrated markets

Keywords: Performance Incentives, Lending Discrimination, Loan Officers, Mortgages, Shadow Banking