Cooked books.

• Author: Zycher, Benjamin
• Position: Regulation

A government study "proving" discrimination in bank loans doesn't add up.

"SO MUCH INJUSTICE. SO LITTLE time." That is the official battle cry of the "discrimination" police now running amok in the Clinton administration. That they may have little time left perhaps ought to give them pause, but do not bet on it: A crusade against "discrimination" is a gold mine for bureaucrats and ideologues in pursuit of bigger budgets and enhanced political power for themselves. That the greater spending and coercive authority derive from so lofty a moral goal as "antidiscrimination" creates both blindness and dishonesty on the part of the morally pure.

Consider, for instance, the 1992 study of racial discrimination in mortgage lending published by the Federal Reserve Bank of Boston. This plainly politicized paper has thrust the lending discrimination issue to the forefront of regulatory policy in banking, notwithstanding an econometric model that is highly suspect conceptually and poor as a predictor, variables defined poorly, and findings that disappear upon deletion of six observations out of about 3,000.

Moreover, the Boston Fed's study data include a substantial number of obvious and probable errors. For example, there are no fewer than 22 cases implying loans with large negative interest rates. One applicant with annual income of $34,000 supposedly received a $400,000 loan, to be repaid in 12 payments of $154. Another $140,000 loan was supposedly approved with a total of eight payments under $1,500.

One approved application was for a loan of $271,000 for someone with an annual income of $11,000; but the dataset indicates that this person's ratios of housing debt payments to income and total debt payments to income are zero. Another observation is similar: a loan of $245,000 was approved for an individual earning $47,000 per year, but the "front end" ratio of housing debt payments to income supposedly is zero. In all, there are no fewer than 13 large loans approved for individuals with modest incomes but with such ratios equal to zero. Other observations record "back end" ratios of total debt obligations to income lower than the ratio of only mortgage debt to income, an obvious inconsistency.

One applicant with annual income of $4,000 was approved for a $181,000 loan, while another applicant with annual income of $5,000 received a loan of $148,000. Those two latter cases, and others like them, may merely indicate that the lenders may have had other information about the borrowers' future income prospects. But even if that were the case, the Boston Fed's statistical analysis would not take such additional information into account, and so would yield misleading findings. It is just as possible, however, that the typist omitted a zero.

INDEED, SOME OF THE DATA SEEM TO BE OBvious numerical errors. One loan was reportedly approved for $979,000 for a house costing $118,000; the actual loan amount was $97,900, as reconstructed from various data sources. A $3,115,000 loan was supposedly approved for the purchase of a $445,000 house; the actual loan was for...