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Fair Lending Analysis of Mortgage Pricing: Does Underwriting Matter?

by Yan Zhang


This paper focuses on potential interaction between the mortgage underwriting and pricing decisions for fair lending analysis of mortgage pricing. We argue that the loan approval or denial decision determines the loan origination population and therefore the underwriting policies might affect the fair lending assessment of the subsequent pricing decisions. The paper also finds that sample selection bias test and estimation are subject to omitted variables and recommends the study of banks' lending policies to better incorporate the decision-making process in fair lending analysis.

The Heckman's sample selection model is used to conduct empirical studies for two national banks to show the potential impact of underwriting on pricing disparities. Monte Carlo simulations are conducted to illustrate the model estimators' large sample properties and investigate the impact of omitted variables on testing and estimating sample selection bias.


Any whole or partial reproduction of material in this paper should include the following citation: Yan Zhang, "Fair Lending Analysis of Mortgage Pricing: Does Underwriting Matter?", Office of the Comptroller of the Currency, Economics Working Paper 2010-1, February 2010.


This Economics Working Paper (PDF 510KB) is available for viewing in Adobe's PDF format. The PDF viewer is available for download free from Adobe in versions for different platforms.