What Constitutes Evidence of Discrimination in Lending?
JOURNAL OF FINANCE, Vol 50 No 2, June 1995
Posted: 3 Nov 1998
We analyze a simple model of bank lending in order to illustrate what can be inferred from relative denial and default rates about lending discrimination. We show that if minority applicants are of lower average creditworthiness than majority applicants, then, contrary to a popular argument, a uniform (non-discriminatory) credit policy cannot simultaneously produce i) higher denial rates for minority applicants, and ii) equal default rates for minority and majority borrowers. Moreover, we show that equality of denial or default rates always implies discrimination. In particular, equal denial (default) rates imply discrimination against majority (minority) applicants.
JEL Classification: G21
Suggested Citation: Suggested Citation