ABSTRACT

Berkovec et al.’s (1994, 1995) finding that minority borrowers have higher default rates has been frequently cited by mortgage lenders as evidence that lenders do not systematically discriminate against African Americans. Glenn B. Canner, one of the coauthors of the Berkovec et al. studies, cautions, however, that this interpretation is inaccurate because there are forms of discrimination that the study does not address (cited in Karr, 1995). For example, Berkovec et al. admit that the default approach cannot test for statistical discrimination, in which lenders face an economic incentive to discriminate because minority borrowers are more likely to default on loans for reasons that are unobservable at loan approval. Berkovec et al. are, in essence, testing for discrimination due to prejudice in which the lender faces a trade-off between his or her prejudice and bank profits, and only approves minority loans that are very good risks.