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Investigating bank lending discrimination in the US using CRA-rated banks’ HMDA loan data

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Abstract

This study investigates the use of HMDA data for CRA-rated (Community Reinvestment Act) banks to study possible bank loan discrimination against minorities from 2007 to 2016. We examine banks rated Outstanding for compliance with the CRA, which means that regulators believe that these banks are doing an outstanding job at serving low- and moderate-income neighborhoods. We expect that CRA Outstanding rated banks are unlikely to commit taste-based discrimination. We find that these banks have statistical discrimination in loan approvals for Asian, Black, Hispanic, and women borrowers. We also find that these banks have statistical discrimination against white males without co-applicants relative to the omitted group of white males with co-applicants. This result is inconsistent with taste-based discrimination. We conclude that either the models or the HMDA data are ill-suited for studying lending discrimination.

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Data availability

All the data used in this study are publicly available.

Code availability

Code is available upon request.

Notes

  1. We note that regulators can and do use more sophisticated models with additional data, but models like ours are used as a first step to identify possible discrimination. Journalists and other researchers also use these simplified models in addition to univariate statistics as a first step to investigate possible discrimination.

  2. The CFPB did not open until July of 2011, which is about in the middle of our sample period. However, we view CFPB enforcement actions in consumer lending as a signal of government and regulators desire and efforts to eliminate taste-based lending discrimination.

  3. Since we introduced taste-based discrimination, let us provide some background on Dr. Black as he states that he just follows the data. Dr. Harold Black is Professor Emeritus in Finance at the University of Tennessee. However, the part of Dr. Black’s background that is relevant to a discussion of taste-based discrimination is that Dr. Black graduated from Booker T. Washington High school in Atlanta, GA, and became the first black male freshman to enroll at the University of Georgia in 1962. He graduated from UGA with his BBA in 1966. He received his MA (1968) and PhD (1972) from The Ohio State University.

  4. See, Cavalluzzo and Cavalluzzo (1998) and Cavalluzzo, Cavalluzzo and Wolken (2002).

  5. We note that improved methods through time have often led to no statistical discrimination where it had been found previously (see, for example, Jackson and Lindley (1989)).

  6. https://www.fdic.gov/resources/supervision-and-examinations/consumer-compliance-examination-manual/documents/11/xi-7-1.pdf.

  7. For general CRA examination schedules, see the FDIC website at https://www.fdic.gov/news/news/financial/2006/8cep_otherexam.pdf for an example of exam schedules.

  8. We also examine FHA-insured loan data for robustness and find little difference from the main results, so the FHA-insured results are not reported in the interest of brevity.

  9. We use the HMDA data as reported to classify applicants based on self-reported ethnicity and race. For applicants choosing Hispanic as their ethnicity, they are coded as being Hispanic and their choice of race is not used. For other non-Hispanic applicants, their choice of race is used to create these indicator variables.

  10. We also estimate Variance Inflation Factors (VIF) in the OLS models to see if there are problems with the estimates being biased due to multi-collinearity. Even though some of the correlations for independent variables approach 40%, the VIFs do not indicate severe collinearity problems.

  11. The Fair Housing Act prohibits discrimination in housing based on: race, religion, gender, national origin, familial status, or disability.

  12. We also have 37 bank observations in the sample of 4-rated banks, but these banks make few if any conventional mortgage loans and were therefore removed. If included, results are the same, so they are omitted in the analysis.

  13. The lender could be discriminating against the co-applicant based on race. The lender knows the co-applicant’s race while making the loan. The co-applicant race is also indicated in the HMDA data. We re-estimate the regressions with an indicator variable that was coded zero if the borrower and co-applicant were the same race, and one if they were different. OLS parameter estimates for the different race co-applicant indicator variable had a p-value of 0.37, and was also insignificant in the logistic regression. Other primary results were unchanged. The data across the whole sample had different races listed between applicant and co-applicant less than one percent of the time for Hispanic applicants, 3.7% of the time for Asian applicants, 4.1% of the time for Black applicants, and 1.9% of the time for White applicants. We thank the referee for pointing out this possibility.

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This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

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Authors and Affiliations

  1. Frank R. Day/Mississippi Bankers’ Association Chair, School of Business Administration, University of Mississippi, 253 Holman Hall, University, MS, 38677, USA

    Ken B. Cyree

  2. Lucille and Raymond Pickering Chair in Finance, Rawls College of Business, Texas Tech University, Lubbock, TX, 79409, USA

    Drew B. Winters

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  1. Ken B. Cyree
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The authors contributed equally to this study.

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Correspondence to Drew B. Winters.

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Cyree, K.B., Winters, D.B. Investigating bank lending discrimination in the US using CRA-rated banks’ HMDA loan data. Public Choice 197, 371–395 (2023). https://doi.org/10.1007/s11127-023-01078-5

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