What Constitutes Evidence of Discrimination in Lending?

JOURNAL OF FINANCE, Vol 50 No 2, June 1995

Posted: 3 Nov 1998

See all articles by Michael F. Ferguson

Michael F. Ferguson

University of Cincinnati - Department of Finance - Real Estate

Stephen R. Peters

Kansas State University - Department of Finance

Abstract

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

Ferguson, Michael F. and Peters, Stephen R., What Constitutes Evidence of Discrimination in Lending?. JOURNAL OF FINANCE, Vol 50 No 2, June 1995. Available at SSRN: https://ssrn.com/abstract=6285

Michael F. Ferguson

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States
513-556-7080 (Phone)

Stephen R. Peters (Contact Author)

Kansas State University - Department of Finance ( email )

Manhattan, KS 66506
United States

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