Do Lenders Still Discriminate? A Robust Approach for Assessing Differences in Menus Do Lenders Still Discriminate? A Robust Approach for Assessing Differences in Menus

By David Hao Zhang and Paul Willen

Findings that minority consumers pay higher interest rates compared with white consumers who are observably similar with respect to the mortgage market can be interpreted as evidence that lenders systematically discriminate against minority borrowers. An alternative explanation for the interest rate disparity is that minority consumers are more constrained in their choice of how much to pay in upfront fees (also known as discount points) in return for lower interest rates. The availability of this choice between a higher upfront fee and a higher interest rate creates a “menu problem” that complicates the detection of lender discrimination and renders methods employed by some studies susceptible to false results. The authors develop a solution to this problem by defining a test statistic for equality in rate and discount point menus and a difference-in-menus metric for assessing whether one group of borrowers would prefer to switch to another group’s menus. They use data from 2018 and 2019 on borrowers’ chosen mortgage rates and discount points to examine whether lenders discriminated against minority borrowers by offering them a distribution of menus that was worse than the one offered to observationally similar non-Hispanic white borrowers.

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