James P. Scanlan, Attorney at Law

This page, which remains a draft, was originally created because of recent public attention to a $335 million settlement of the Department of Justice’s case against Bank of America’s Countrywide Financial Corporation.  It addresses crucial misperceptions about disparities in mortgage rejection rates and other adverse lending outcomes.  The subject is one of increasing importance in light of the Department of Housing and Urban Development’s recent proposed rule applying disparate doctrine to enforcement of the Fair Housing Act, something that the Department of Justice had already been doing, and the April 18, 2012 notice of the Consumer Financial Protection Bureau that it will apply the disparate impact doctrine in its enforcement of the Equal Credit Opportunity Act.  The subject is also important because it involves a remarkable episode in federal law enforcement, given that for 18 years the federal government, out of concern about large racial disparities in mortgage rejection rates and other adverse lending outcomes, has encouraged lenders to engage in conduct that would increase those disparities, thereby making themselves more likely targets for litigation. This occurred because the involved federal agencies, like most other entities dealing in one manner or another with demographic differences, simply did not know any better.  A matter of continuing interest will be how the Department of Justice and other arms of the federal government act when confronted with the undeniable fact that certain of their perceptions are the exact opposite of reality, as addressed on the Holder/Perez Letter sub-page to this page.

This page is closely related to the Discipline Disparities page, which addresses the fact that Department of Education and Department of Justice have attributed large racial differences in public school discipline rates to stringent discipline policies when the exact opposite it the case.  That is, the more stringent the policy, the smaller will tend to be racial differences in discipline rates.

Many pages of this site address the patterns by which, for reasons related to the shapes of normal distributions of factors associated with experiencing an outcome, standard measures of differences between outcome rates tend to be affected by the overall prevalence of an outcome.  The most notable such pattern is that whereby the rarer an outcome the greater tends to be the relative difference in experiencing it and the smaller tends to be the relative difference in avoiding it.  Over 160 references explaining the bearing of this and related patterns to the interpretation of differences in the law and the social and medical sciences may be found on the Measuring Health Disparities page.  Nuances of these patterns are addressed on the Scanlan’s Rule page. 

In the lending context, the most obvious implication of these pattern involves the way that the relaxing of lending criteria, as the federal government encouraged lenders to do in the Evidence of Disparate Impact section of the March 8, 1994 Interagency Policy Statement, will tend to increase relative differences in mortgage rejection rates.  Articles that in some manner address implications in the lending of the pattern whereby the rarer an outcome the greater tends to be the relative difference in experiencing it and the smaller tend to be the relative difference in avoiding it are listed below.  The most recent of these, which involves the Department of Justice’s recent settlement with Countrywide Financial Corporation, provides the most succinct (under 800 words) presentation of the matter.  Item (g) provides a particularly useful exposition of the matter at somewhat greater length (about 2600 words).

(a) “The Lending Industry’s Conundrum,” National Law Journal (Apr. 2, 2012). 

(b) “Race and Mortality” (Society, Jan.-Feb. 2000);

(c) “Confusion over Credit Discrimination” (unpublished, 1997);

(d) "Both Sides Misuse Data in the Credit Discrimination Debate," American Banker (July 22, 1998);

(e) "Responsive Banks Hurt by Improper Data Interpretation," Montgomery Journal (May 5, 1998);

(f) "Perils of Using Statistics to Show Presence or Absence of Loan Bias," American Banker (Dec., 1997);

(g) "Statistical Anomaly Penalizes Fair-Lending Effort," American Banker (Nov. 18, 1996);

(h) “When Statistics Lie” (Legal Times, Jan. 1 1996);

(i)  “The NationsBank Case and the Misunderstanding of Statistical Proof of Discrimination” (unpublished, 1995)

(j) “Getting it Straight When Statistics Can Lie,” (Legal Times, June 23, 1993)

(k) “Statistical Anomaly Penalizes Fair Lending Effort, American Banker, Apr. 27, 1992;

 (l) “The Perils of Provocative Statistics” (Public Interest, Winter 1991).[i]  

 Key points of these items, which points have been, or may be, eventually elaborated upon on this page or sub-pages to this page, are discussed below, along with some recent developments and issues not previously considered in this context.  To facilitate the reader’s use of this page, I list the topics immediate below.  Highlighted items are also treated on sub-pages to this page.  The Lathern v. NationsBank sub-page treats the suit that is the subject of items (b), (g) and (h). 

1.  Implications of Relaxing Lending Criteria. 

2.  Underadjustment Issues 

3.  Implications of Large Relative Differences in Rejection Rates among High-Income Groups

4.  Higher Default Rates among Minorities as Putative Evidence of the Absence of Discrimination

5. Recent Studies of Racial Differences in Foreclosure Rates

6. Measuring Disparities with Odds Ratios

7. HAMP and Racial Disparities

8. Partial Picture Issues

Subpages include:

Lathern v. NationsBank (treats subject of items (c), (h) and (i). 

Adjustment Issues (elaborates on item 2)

Disparities – High Income  (elaborates on item 3)

Holder/Perez Letter (addresses April 23, 2012 letter to Attorney General Eric H. Holder, Jr. and Assistant Attorney General Thomas E. Perez)

1.  Implications of Relaxing Lending Criteria

There existed considerable sentiment that observed mortgage rejection rate disparities occurred not because (or at least not so much because) of intentional discrimination, but because standard lending criteria tended to disproportionately disadvantage minorities.  Thus, banks were encouraged to relax those criteria.  But the relaxing of criteria, while reducing disparities in approval rates, tends to increase disparities in rejection rates.  Because few people understand this, however, banks that were most responsive to the encouragement to relax lending criteria became especially vulnerable to being singled out for litigation due to their large rejection rate disparities (as in the case of the suit against NationsBank discussed in the Lathern v. NationsBank sub-page and its references.

2.  Underadjustment Issues

Anyone with the least understanding of normal distributions will recognize that in analyses of group differences in outcome rates efforts to adjust for differences in group characteristics associated with the outcome will invariably fail to fully address the role of those differences.  A group that on average has lower qualifications relating to securing an outcome will be disproportionately represented within the lower reaches of each adjustment category.  Thus, within high, medium, or low income categories (or more refined categories), the average incomes of minorities will tend to be lower than the average income of whites.  And of course the differences in wealth of minorities and whites earning the same income are well-documented.  Further, for every credit rating, however refined, the financial circumstances of minorities will on average be somewhat weaker than those of whites.  But those who recognize the tendency toward underadjustment are often inclined to think that, even if there is some underadjustment, unaccounted for differences could not be great enough to explain what are perceived to be very large residual disparities in rates of experiencing an adverse outcome.  Such thinking, however, fails to recognize that seemingly large relative differences in rare outcomes can be explained by seemingly small differences in average (and average unaccounted for) qualifications.

These issues are now more fully addressed on the Adjustment Issues sub-page.  

3.  Implications of Large Relative Differences in Rejection Rates among High-Income Groups

During the 1990s it was asserted that claims that lending disparities could be explained by income differences were refuted by the fact that rejection rate disparities were found to be larger in higher-income categories than lower-income categories.  Even if, properly measured, disparities were found to be larger in higher-income categories, such fact would have little bearing on the issue of whether there existed discrimination absent a showing that the differences between the financial circumstances of the groups were the same within each income category.  Even then, I am not sure I see the logical basis for the contention.  More pertinent to the principal statistical issues addressed on this page, however, the contention is based on relative differences in rejection rates.  Because rejection rates tend to be comparatively low among higher-income groups, relative differences in rejection rates tend to be high (though relative differences in approval rates tend to be low) among such groups.

This issue is now more fully addressed on the High Income Group Disparities sub-page..

4.  Higher Default Rates among Minorities as Putative Evidence of the Absence of Discrimination

During the 1990s, as discussed in the 1997 unpublished piece and the 1998 American Banker piece, a number of observers (including Nobelist Gary Becker) argued that the higher default rates among minority borrowers tended to refute claims of widespread credit discrimination.  Those observers found in the higher minority default rates evidence that minorities had in fact been subjected to lower standards.  (That same reasoning underlies claims that higher qualifications of Asians admitted to universities is evidence of discrimination against Asian applicants, as discussed in item j).  But in consequence of the same feature of normal distributions underlying points 1 through 3 above, a group that on average has weaker qualifications among applicants will tend to have weaker qualifications among those approved, even when the group has been discriminated against (as illustrated with regard to employment in Table IV of “Illusions of Job Segregation” (Public Interest, Fall 1988)). 

 

5. Recent Studies of Racial Differences in Foreclosure Rates

 

Recently, in consequence of the foreclosures crisis, further attention is being given to the same sorts of disparities in defaults and foreclosures that in the 1990 led observers to regard (incorrectly, as discussed in item 4 supra) as evidence of the absence of credit discrimination.[ii] Now, however, the same disparities appear to be regarded as evidence that minorities were steered to higher risk loans.  The study referenced in note iv gives much attention to the large racial disparities among higher-income groups in a manner somewhat akin to that discussed in item 2 supra, but, in any case, without recognition of the statistical forces leading toward large relative difference in adverse outcomes (though small relative differences in favorable outcomes) where adverse outcomes are less common.  A central point of the study is that minorities have been especially impacted by the foreclosure crisis and policies should be implemented to reduce foreclosure rates.

I have not seen data on disparities in foreclosures prior to the foreclosures crisis (though there may be such data cited by the commentators referenced in item 4).  But the statistical forces described in the references mentioned at the outset are of a nature that would cause relative differences in foreclosures to be smaller (though relative differences in avoiding foreclosures to be larger) following the crisis than they were previously.  Similarly, general efforts to reduce foreclosures, if successful, will tend to increase relative differences in foreclosure rates while reducing relative differences in rates of avoiding foreclosure. See item 7 infra. 

6. Measuring Disparities with Odds Ratios

The above-referenced works on the disparities in lending outcomes was responding to perceptions concerning relative differences in adverse outcome rates.  But the Department of Justice complaint in the Countrywide case discussed disparities in things like assignment to subprime loans in terms of odds ratios.[iii]  The odds ratio is the standard output of common the statistical method (logistic regression) for attempting to adjust for differences in characteristics, which is presumably why the Justice Department employed the measure in its complaint.  While the difference measured by the odds ratio is often regarded simply as an alternative formulation of the relative difference, it differs in certain respects.  The key respect pertinent here is that the difference measured by the odds ratio is the same regardless of which outcome is examined.[iv] 

But in order for a measure to provide useful information for comparing the size of two disparities, or even for abstractly appraising the size of one disparity, the measure must remain constant when there occurs a simple change in overall prevalence of an outcome akin to that effected by lowering a test cutoff.  And, like two relative differences, the difference measured by odds ratios tend to change as the prevalence of an outcome changes, though in a more complicated way than the two relative differences. 

Differences measured by the odds ratio tend to change in different directions at different points across the distributions and tends generally to change in the same direction as the larger relative difference.  Roughly, as rare outcomes become more common, the difference measured by the odds ratio tends to decrease; as common outcomes become extremely common, differences measured by odds ratios tend to increase.[v]  The important thing to understand about odds ratios in the instant context, however, is that adverse lending outcomes usually are in ranges where reductions in those outcomes tend to increase differences measured by odds ratios (as illustrated, for example, toward the right hand side of Figure 4 of the 2009 Royal Statistical Society presentation).  Thus, things that reduce the prevalence of adverse lending outcomes –  whether the outcome is the rejection of an application, receipt of a less advantageous type of loan, or foreclosure  –  will tend to increase both relative differences in rates of experiencing the outcome and differences measured by the odds ratio. 

7. HAMP and Racial Disparities

The federal government’s Home Affordable Mortgage Program (HAMP), which provides assistance to persons whose mortgage payments exceed 31% of monthly gross income, presumably will result in a reduction in overall foreclosure rates.  Such program thus, while tending to reduce relative differences between rates at which whites and minorities will be able to keep their homes, will likely increase relative differences in foreclosure rates.[vi]

But some attention is now also being given to racial differences in rate of successfully taking advantage of the HAMP program.  A National Community Reinvestment Coalition (NCRC) survey found, based rates of securing HAMP assistance for 24.3% of black and 36.4% of white HAMP eligible borrowers, that whites were almost 50% more likely to receive assistance than blacks.  Thus the study examined the matter in terms of relative differences in favorable outcomes.

Should overall rates of receiving help under the program increase, the relative difference in receiving assistance is likely to decline, though the relative difference in failing to receive assistance will likely increase.  At some point, the relative difference in adverse outcomes may exceed the relative difference in favorable outcomes, at which time some may be inclined to start to measure the disparity in terms of relative differences in adverse outcomes.  That in fact is the approach of the Agency for Healthcare Research and Quality (as discussed, inter alia, in to the 2007 APHA presentation and its Addendum). 

The 36.4% and 24.3% white and black assistance rates reported in the study translate into a difference between the hypothesized underlying means of approximately .35 standard deviations according to the procedure discussed on the Solutions sub-page of the Measuring Health Disparities page.  Assuming that difference remained constant across the distribution, at the point where the white rate reached approximately 57%, the black rate would be about 43.6% and the relative difference in the adverse outcome would start to exceed the relative difference in the favorable outcome.  At the point where the white rate reached approximately 90%, the black rate would be about 82.6%.  Thus, while the relative difference in the favorable outcome would be less than 10%, the black adverse outcome rate would be approximately 1.8 times the white rate.  It is doubtful, however, that the program would ever achieve such substantial results.

On the other hand, if the program were contracted, the relative difference in the favorable outcome would tend to increase while the relative difference in the adverse outcome would tend to decrease.  At the point where the white favorable outcome rate was reduced to 5%, the black rate would be about 2.3%.  So, while the relative difference in the adverse outcomes would then be very small, the white favorable outcome rate would be more than twice the black favorable outcome rates. 

The NCRC study also found that borrowers not eligible for HAMP received modifications of their loans more often than eligible borrowers.  This presumably occurred because a smaller proportion of the HAMP-eligible borrowers were in a position to come to a workable arrangement with the lender.  The study did not present black and white rates of loan modification among HAMP-eligible and non-HAMP-eligible borrowers.  The study seemed to have far too few respondents to make such a breakdown useful.  But in a larger-scale study one would likely find that among the non-HAMP-eligible (where loan modification rates were higher than among the HAMP-eligible), the relative difference between black and white loan modification rates would be smaller, and the relative difference between rates of failing to secure modifications would be larger, than among the HAMP-eligible borrowers.  See the Higher Income sub-page.

8.  Partial Picture Issues

Studies of minority-white white differences in assignment to sub-prime loan status, like that in the Department of Justice’s Countrywide complaint, involve examination only of whites and minorities who received loans.  The entire universe of persons seeking loans also included persons who did not receive loans at all.  Thus, the analysis may well be subject to some of the problems addressed in Illusions of Job Segregation (Public Interest, Fall 1988) and other articles collected in the Section A of the Employment Discrimination page.  Without information on the entire universe of loan seekers, however, it is difficult to appraise the implications of failure to include the rejected applicants in an analysis. 

The absence of rejected applicants from an analysis would also raise issues concerning the utility of the Solutions approach to examination of effects of race on the treatment of loan applicants,  since populations that do not include rejected applicants are truncated portions of the larger populations.  See the Truncation Issues sub-page of the Scanlan’s Rule page.  Of course, even the universe of persons attempting to purchase homes may be truncated portions of larger populations a fact that can raise similar issues.  See Second Comment on Werner Circulation 2008.  Again, however, it would be necessary to examine data on all persons seeking loans to appraise the importance of this issue.