Existing knowledge about lender behavior at the pre-application stage comes
primarily from paired testing (also known as fair lending audits) undertaken
by fair housing advocacy agencies whose mission is to promote fair housing
through a variety of channels, including litigation. Testing has been used
widely for analytic as well as investigative studies of discrimination by landlords and real estate agents; however, only a few relatively small-scale investigative studies—primarily by the National Fair Housing Alliance (NFHA)—
have been applied to mortgage lending.
The NFHA audits, funded by the U.S. Department of Housing and Urban
Development’s Fair Housing Initiatives Program (FHIP), were conducted by
fair housing enforcement organizations using testers who posed as first-time
homebuyers and refinancers at the pre-application stage. Testers, matched on
ratios that relate a household’s income and debts to the desired loan amount,
visited lenders in person to inquire about the types and terms of loans for
which they might qualify. After each visit, testers answered a set of closedended questions and wrote extensive narratives about their experiences. NFHA
conducted tests in seven cities (Atlanta, Chicago, Dallas, Denver, Detroit,
Oakland, and Richmond), with about two-thirds of the tests concentrated in
Chicago and Oakland.
NFHA concluded that lenders often appeared to be less interested in giving information to black customers than to whites; urged black customers, but
not whites, to go to another lender; and emphasized to black customers, but
not whites, that application procedures would be long and complicated.
According to these investigative audits, blacks were also more likely than
equally qualified whites to be told that they did not qualify for a mortgage
(before they had filed a formal application), and whites were more likely to be
“coached” on how best to handle potentially problematic aspects of their credit
profile (Smith and Cloud 1996).
Given their purpose, NFHA’s tests were not designed to produce statistically
valid measures of the incidence of discrimination across lenders or markets.
However, NFHA provided the Urban Institute access to data from a large number
of the tests it conducted, enabling researchers to construct and analyze a database of statistically tractable information (see chapter 2). It is important to keep
in mind that findings from this analysis apply only to the specific sample of
lenders tested by NFHA, which were selected in large part because they had
already shown signs of potential discriminatory behavior. Nevertheless, these tests
provide convincing evidence of significant differential treatment discrimination at
the pre-application stage and highlight the need for further testing with a sample
that is large and representative enough to allow for statistical estimation.
The most basic measure of service at the pre-application stage is whether a
customer is seen by a lender and given information about specific loan prod