What Constitutes Evidence of Discrimination in Lending?

Michael F Ferguson and Stephen R Peters

Journal of Finance, 1995, vol. 50, issue 2, 739-48

Abstract: The authors analyze a simple model of bank lending in order to ascertain what can be inferred from relative denial and default rates about lending discrimination. They show that if minority applicants are of lower average creditworthiness than majority applicants, then, contrary to a popular argument, a uniform, nondiscriminatory credit policy cannot simultaneously produce higher denial rates for minority applicants and equal default rates for minority and majority applicants. Moreover, the authors show that equality of denial or default rates always implies discrimination. In particular, equal denial (default) rates imply discrimination against majority (minority) applicants. Copyright 1995 by American Finance Association.

Date: 1995
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