A study that deserves no credit
The banking industry stands accused and convicted, by the media and others, of engaging in lending practices that discriminate against minorities. When the New York Times reported this week that "shamed and embarrassed" lenders were "finally" opening their doors to minority groups, it quoted one advocacy lawyer as saying: "It's a little hard to cheer too loudly; we are still in the early stages of overcoming decades of prejudice and neglect."</br></br>Upon what evidence are these statements so confidently asserted? There is only one study of mortgage decisions that takes into account the economic characteristics of mortgage applicants, making it the only serious examination of this issue. That study, published by the Federal Reserve Bank of Boston last fall, examined approximately 3,000 mortgages made in the Boston area in 1990. Although it found that financial attributes played the leading role in mortgage acceptance or rejection, and although it showed that minorities had financial attributes more likely to cause rejection than did whites, its bottom-line conclusion was that minorities were discriminated against.</br></br>The study has been described by regulators as "definitive," and its conclusions have become part of the media's conventional wisdom. But how reliable is the Boston study?</br></br>After some prodding, the Boston Fed has finally released its data. A careful analysis reveals, alas, that the study is seriously flawed. Most important, it suggests that the study's conclusion concerning racial discrimination in mortgage lending should be disregarded.</br></br>The authors of the Fed study claim that they scrupulously weeded out errors by examining the data for inconsistencies. But a colleague and I performed several checks on the raw numbers and were astonished to discover literally hundreds of errors or likely errors.