Significant disparities in credit availability, loan terms, and lending volume between demographically dissimilar groups of borrowers are sometimes regarded as evidence of possible ethnic, racial, or gender discrimination by lenders. Extant models of lending discrimination based on assumptions of credit market inefficiencies, such as adverse selection, are becoming increasingly implausible due to the competitive structure of credit markets and the accuracy of evaluating individual credit risk. We explore a model of mortgage lending in an economy with complete markets, common information, and arbitrage-free pricing, which is in sharp contrast to existing models of demographic discrimination. Even when borrowers who are only distinguishable by observable demographic factors share an identical measure of individual credit risk, market equilibria in this classical context may demonstrate discrimination. When rational lenders believe that one or more of these traits are directly related to adverse features of the representative property securing the loan to a borrower in this class, higher loan terms, a higher frequency of loan denials, or complete rationing of credit to this class of borrowers may be a value-maximizing strategy. These qualities, which are not included in typical statistical underwriting and regulatory review procedures, lower the value of the collateral available to the lender in the case of future default. Discrimination on this basis will be a property of all market equilibria and can be consistent with an efficient allocation of credit when loans are secured by such properties and both lenders and borrowers act strategically.
Author (S) Details
David Nickerson
Rogers School of Management, Ryerson University, 350 Victoria Street, Toronto, Ontario M5B 2K3, Canada.
View Book :- https://stm.bookpi.org/MPEBM-V6/article/view/3410
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