An Analysis of Alternative Methodologies and Interpretations of Mortgage Discrimination Research Using Simulated Data‪.‬

INTRODUCTION For the past several years, researchers have focused on investigating discrimination in the residential mortgage market. New data and methodologies have been employed and new theoretical lending models have been developed to explain why loan approval rates are higher for non-minority applicants than for minority applicants. There has been intense debate on the significance of default rates in identifying or ruling out discriminatory lending and on the appropriate methodology to use in testing for discrimination. This paper reviews the debate and uses simulated data to provide conclusive evidence on the merits of the alternative theories and methodologies. Understanding the relationship of default rates as potential indicators of discrimination and assuring that the methodology used in these studies is appropriate is very important because the findings of discrimination studies may be used to influence public policy.