The cost of racially equal approval rates in mortgage lending

We investigate the feasibility of one solution to the problem of persistent unequal mortgage approval rates for different ethnic groups. Previous research suggests that a trade-off exists between equal approval rates for all ethnic groups and the ability of lenders to predict loan defaults. The purpose of this investigation is to measure the decline in the ability of underwriters to estimate the probability of loan defaults associated with a modification of the traditional mortgage underwriting process to produce an equal probability of approval for all ethnic groups. The primary conclusion is that the 4.2% increase in minority approval rates required to produce equal approval rates for the majority and the minority results in 15.1% more errors in the prediction of the number of defaults.