Race, Mortgage Lending and Loan Rejections in a U.S. City

Abstract

The negative effect of neighborhood racial composition on mortgage lending has been documented in recent years in several cities, even after controlling for income, condition of housing and related neighborhood and housing characteristics. Lending industry officials maintain that the racial distribution of mortgage lending is the unintended consequence of profit-based lending activities. In contrast, community activists and civil rights groups claim that racial discrimination is the motivating force underlying mortgage lending practices. Data from the 1991 Home Mortgage Disclosure Act (HMDA) for the Kansas City metropolitan area are used to measure trends in mortgage lending and loan rejection ratios by local lenders. This study finds that Kansas City lenders reject minority applicants at higher rates than whites and reject high-income minorities as often as low-income whites. More importantly, results show that high-income African Americans are rejected at a higher rate than low-income whites, indicating that race of loan applicants plays a crucial role in the decision to approve a mortgage loan, even after controlling for income and other factors. Findings from Kansas City and other cities indicate that the low percentage of minority loan applications from some lenders suggests not only meager marketing, but possible pre-screening of minority applicants where they are discouraged from completing an application form.