Fair Lending Analysis of Mortgage Pricing:
Does Underwriting Matter?
Published online: 19 May 2011
Springer Science+Business Media, LLC (outside the USA) 2011
Abstract This paper evaluates the impact of underwriting decision on fair lending
risk assessments of loan pricing. Using data from one national bank that contain a
rich set of decisioning variables, we compare the estimation results from the single
equation model with those from the sample selection type of models. Then we
conduct three simulation studies to evaluate the sample selection bias and omitted
variable bias under various scenarios. We demonstrate that the single equation
approach could potentially generate biased estimates of pricing disparities when it
fails to consider the impact of the underwriting decision.
Fair lending analysis
Omitted variable bias
Fair lending risk assessments of mortgage pricing seek to determine whether
similarly situated minority and nonminority borrowers receive differential treatment
with regards to mortgage prices offered by mortgage lenders.
Pricing decisions in mortgage lending have become increasingly sophisticated
and complex. New loan products with various terms and features are continuously
being invented. Mortgage pricing is based on a borrower’s creditworthiness and the
characteristics of the loan and property, as well as the cost of obtaining the loan,
which includes fees, points, mortgage insurance premiums, etc. As a result,
mortgage prices are continuous rather than discrete, varying for different borrowers.
The variation in prices has enabled loan-level statistical analysis and modeling to
measure pricing disparities in mortgage lending; for example, see Courchane and
Nickerson (1997), Crawford and Rosenblatt (1999), Nothaft and Perry (2002), Black et
J Real Estate Finan Econ (2013) 46:131–151
Y. Zhang (*)
Office of the Comptroller of the Currency, 250 E St. SW, Washington, DC 20219, USA