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Fair Lending Analysis of Mortgage Pricing: Does Underwriting Matter?

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Abstract

This paper evaluates the impact of underwriting decision on fair lending risk assessments of loan pricing. Using data from one national bank that contain a rich set of decisioning variables, we compare the estimation results from the single equation model with those from the sample selection type of models. Then we conduct three simulation studies to evaluate the sample selection bias and omitted variable bias under various scenarios. We demonstrate that the single equation approach could potentially generate biased estimates of pricing disparities when it fails to consider the impact of the underwriting decision.

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Notes

  1. No information that identifies the bank or its customers is disclosed here.

  2. Systematic differences might exist between the prices of denials and originations. For example, the APRs of the denials might be closer to their NRs and lower than they would have been if the loans had been approved, because certain loan costs such as points, fees, and mortgage insurance premiums might not be finalized until the loans are originated.

  3. There are two types of DTI ratio: the front-end and the back-end ratio. The front-end ratio calculates the ratio of housing expenses over income; while the back-end ratio also considers other recurring debts besides the housing costs. We decide to use the back-end DTI ratio in this paper.

  4. The corresponding odds ratio is exp(0.2296) = 1.26.

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Acknowledgements

The views expressed in this paper are those of the author and do not necessarily reflect the views of the Office of the Comptroller of the Currency or the U.S. Department of the Treasury. I would like to thank Jason Dietrich, Irene Fang, Gary Whalen, Irina Paley, and especially the anonymous referee for their insightful comments and suggestions. I am also grateful to Beth Kaplan for excellent assistance with editing. Any errors are my own responsibilities.

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  1. Office of the Comptroller of the Currency, 250 E St. SW, Washington, DC, 20219, USA

    Yan Zhang

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  1. Yan Zhang
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Correspondence to Yan Zhang.

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Zhang, Y. Fair Lending Analysis of Mortgage Pricing: Does Underwriting Matter?. J Real Estate Finan Econ 46, 131–151 (2013). https://doi.org/10.1007/s11146-011-9319-y

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