Race in Relation to Bank Depositors and Mortgage Applications

Abstract

Data associated with the Home Mortgage Disclosure Act (HMDA) are often studied for evidence of discrimination in terms of minority applicants or for home location in minority neighborhoods, with mixed results. The present analysis utilizes a data set covering 2014–2016, combining characteristics of home location and applicants from the HMDA data with information on depositor characteristics from the Federal Insurance Deposit Corporation's Summary of Deposits data and the Census Bureau's American Community Survey. Consistent with predictions from the red‐lining literature, loan acceptance rates are adversely influenced by high minority locations, although the effect is larger for minority applicants. The relationship banking literature predicts that community banks will yield higher rates of loan acceptance, and the results support that hypothesis. That same literature suggests that familiarity in terms of similar race/ethnicity characteristics for depositors and home location or loan applicants will yield a loan acceptance advantage; and that hypothesis is not supported. Subsidiary analyses suggest that market competition improves loan acceptance rates for minority applicants, consistent with models of discrimination. Additionally, minority depositors are associated positively with loan acceptance rates, which may reflect higher levels of bank risk, and a risk premium, in those markets.