A note on identification of discrimination in mortgage lending

This paper shows how reduced form estimates of discrimination in mortgage lending may be biased by race differences in loan demand. The result, which follows formally from the model of the mortgage lending process developed in the seminal paper by Maddala and Trost(1982), has important implications for the regulation of financial institutions. It also reinforces findings of Rachlis and Yezer (1993) and Yezer, Phillips and Trost (1994). A review of recent empirical evidence on race differences in loan demand suggests that this factor may help explain mortgage loan application differentials.