Revised article published in American Economic Review 86, no. 1 (March 1996): 25-53.

The results of this study indicate that minority applicants, on average, do have greater debt burdens, higher loan-to-value ratios, and weaker credit histories and they are less likely to buy single-family homes than white applicants, and that these disadvantages do account for a large portion of the difference in denial rates. Including the additional information on applicant and property characteristics reduces the disparity between minority and white denials from the originally reported ratio of 2.7 to 1 to roughly 1.6 to 1. But these factors do not wholly eliminate the disparity, since the adjusted ratio implies that even after controlling for financial, employment, and neighborhood characteristics, black and Hispanic mortgage applicants in the Boston metropolitan area are roughly 60 percent more likely to be turned down than whites. This discrepancy means that minority applicants with the same economic and property characteristics as white applicants would experience a denial rate of 17 percent rather than the actual white denial rate of 11 percent. Thus, in the end, a statistically significant gap remains, which is associated with race.

The information gathered in this survey provides some insight into how this outcome emerges. Many observers believe that no rational lender would turn down a perfectly good application simply because the applicant is a member of a minority group. The results of this survey confirm this perception; minorities with unblemished credentials are almost (97 percent) certain of being approved. But the majority of borrowers - both white and minority - are not perfect, and lenders have considerable discretion over the extent to which they consider these imperfections as well as compensating factors.