Discreditable reports: are bankers letting racism interfere with profits? Now that would be news - how a Washington Post three-part report, June 6-8, 1993, misrepresented statistical data to show racist practices in mortgage lending

National Review, July 19, 1993 by Llewellyn H. Rockwell, Jr.

Read further in the massive story, however, and you discover that, as a sidebar put it, "Credit-history information on applicants--a key element in lending decisions--did not have to be reported to federal regulators, so it couldn't be evaluated." Oh.

Assets are another important criterion for loans. The higher the dollar value of assets, the more likely a loan can be paid back, and therefore the more likely the loan will be granted. But the assets of the median black family are one-tenth those of the median white family. Only 35 per cent of black households involve married couples, another key predictor of loan payback. As even the Fed admits in its November 1992 Federal Reserve Bulletin, "minority applicants on average" have "weaker credit histories, fewer liquid assets, and lower net worths and incomes than white applicants." This alone explains the disparity.

A Fed study in late 1992 analyzed data collected during 1991. Of people applying for conventional mortgages, 17.3 per cent of whites were rejected as against 37.6 per cent of blacks, producing a racial gap of about 20 points. When income differences are taken into account, the gap shrinks to 13 points. Among high-income applicants, the gap narrows to as little as 7 points: well-to-do blacks obtained mortgage loans 74 per cent of the time, compared with 81 per cent of the time for whites. Credit history, job history, and other factors were not considered by the Fed, however.

Another study often cited as proving systematic racial discrimination comes from the left-wing Association of Community Organizations for Reform Now (ACORN). In the ominously entitled "Take the Money and Run" (June 8, 1992), ACORN says that black communities receive fewer mortgages, in proportion to their deposits in local banks, than white communities.

But just how relevant is this deposit/loan ratio? Loans are not given to "communities," but to individuals. The study ignores variables, such as credit ratings, assets, and jobs, and therefore can be ignored.

And what of the famous Boston Fed study? Not only was it refuted by Mr. Brimelow and Miss Spencer, but its author (Alicia Munnel, now gone to glory in the Clintonian Treasury) admitted to the Forbes editors that while she believes "discrimination occurs," she has no evidence for it. "No one has evidence," she added. She still intends, however, to use her new post to punish the banks for racism.

Enough of bogus studies. In 1989, the New York State Banking Department did a real examination of ten New York banks that had been accused of discrimination. The department looked at specific applications and concluded that the banks had applied their underwriting standards objectively The gap, in other words, was explained by differences in credit-worthiness.

Yes, there is discrimination in the market for loanable funds: people who pay their bills and otherwise act prudently are favored over those who don't. And isn't this how it should be? The capital for loans comes from savings (present or future). If bankers are to make the two sides of the ledger balance over time, they must be able to predict the future behavior of borrowers. It is this procedure that is under attack.