ABSTRACT
The empirical analysis described in BCGH indicates that black borrowers have both higher observed default rates and higher loan losses on mortgages, after controlling for available indicators of loan quality. According to the model developed by BCGH, discrimination in underwriting, by holding minorities to higher standards, results in improvements in observed minority Federal Housing Administration loan performance when compared with a nondiscriminatory baseline. The extension in the BCGH study shows that the performance differential from discrimination occurs even after conditioning on observable credit quality characteristics due to a shift in the distribution of unobserved characteristics of accepted borrowers. The BCGH presumption is that underwriting decisions are based on observable and unobservable factors that generally are indicative of loan performance. According to the BCGH model, discrimination always causes the shift in the distribution of the unobservable component of credit quality and a corresponding shift in expected loan performance.
