“Mortgage Lending in Boston: Interpreting HMDA Data,” a 1992 Boston Fed paper, tested the validity of lenders’ claims that factors besides race explained Home Mortgage Disclosure Act data showing a higher mortgage denial rate for minorities. The paper’s conclusion, that discrimination indeed played a significant role in the disparity, grabbed attention nationwide. We sum up the paper here:

Contrary to the contention of lenders at the time, an applicant’s race played a significant role in determining whether their mortgage application was approved or denied. This was the finding of “Mortgage Lending in Boston: Interpreting HMDA Data,” a pivotal paper authored by Boston Fed economists in the 1990s.

The federal Home Mortgage Disclosure Act, or HMDA, was enacted in 1975, in part to monitor minority applicants’ access to the mortgage market. The act requires financial institutions to make their mortgage data available to the public, compelling them to disclose, among other information, each applicant's race, gender, and income, and whether the application was accepted or denied. The data collected as a result of HMDA showed a denial rate for Black and Hispanic applicants across the country that was two to three times higher than the denial rate for white applicants.

This pattern suggested that mortgage lenders discriminated against minorities. However, lenders argued that such a conclusion was unwarranted because the HMDA data did not include information on applicants’ credit histories, debt burdens, loan-to-value ratios, and other factors that financial institutions consider when deciding whether to approve a mortgage. The lenders claimed the missing information, not discrimination, explained the higher denial rate for minority applicants.

“Mortgage Lending in Boston: Interpreting HMDA Data,” authored by Boston Fed economists Alicia Munnell, Geoffrey Tootell (now the director of the Boston Fed’s research department), Lynn Browne, and James McEneaney in 1992 and published by The American Economic Review in 1996, examined whether the lenders’ argument was valid by focusing on the Boston mortgage market.

To address the limitations of the HMDA data, the authors asked lending institutions operating in the Boston area to identify the financial, employment, and property characteristics of applicants that they used when making their lending decisions. They then asked lenders to provide this information for all of their Black and Hispanic mortgage applicants and a random sample of 3,300 white applicants from 1990.

The HMDA data for Boston for 1990 showed that minority applicants were nearly three times more likely to be denied mortgage loans compared with white applicants. In fact, they revealed that high-income minority applicants were more likely to be turned down than were low-income white applicants.

The Boston Fed study did find support for the lenders’ argument that the HMDA data weren’t telling the whole story: Boston’s minority applicants, on average, had less wealth, weaker credit histories, and higher loan-to-value ratios compared with white applicants, and these factors accounted for a sizable portion of the difference in denial rates, though not nearly all of it.

When they included these additional characteristics in their regression analysis, the authors found that the disparity between the rates of loan denials for minority applicants and white applicants fell from the 18 percentage points reported in the HMDA data to just over 8 percentage points—a difference that was still significant. Put another way, white applicants with the same property and personal characteristics as minority applicants would have experienced a rejection rate of 20 percent, while those minority applicants would have been rejected at a rate of 28 percent.

“Thus, in the end, a statistically and economically significant gap between white and minority rejection rates remains,” the authors wrote.

The study’s findings suggested that despite the scope of information available to lenders, and all the information they said they used in the decision-making process, race still played a significant role in determining whose mortgage applications were approved and whose were denied.

“The results of this study suggest that, given the same property and personal characteristics,” the authors wrote, “white applicants may enjoy a general presumption of creditworthiness that black and Hispanic applicants do not.”