Discreditable reports: are bankers letting racism interfere with profits? Now that would be news - how a Washington Post three-part report, June 6-8, 1993, misrepresented statistical data to show racist practices in mortgage lending

THE CONCEPT of creditworthiness, one of the last vestiges of institutionalized merit, is now under assault. Indeed, in the past year, loan discrimination has become the newest left-wing cause.

No campaign of the Left would be complete without a three-part series in the Washington Post. In "Separate and Unequal" (June 6-8, 1993), staff writers Joel Glenn Brenner and Liz Spayd claimed pervasive racial discrimination in mortgage lending and argued for a step-up in government intervention to cure it.

The Post's story accused Maryland, D.C., and Northern Virginia banks and thrifts of giving twice as many mortgages to white neighborhoods as to "comparable" black ones. Moreover, it claimed that banks locate a "disproportionate" number of branches in "white communities."

No need to read the interminable thirty thousand words. The message was clear in the headlines and pull-quotes: white bankers are oppressing black would-be homeowners through illegal lending procedures. Indeed, House Banking Committee Chairman Henry Gonzalez (D., Tex.) scheduled hearings on the supposed problem one day after the Post's encyclical ended.

As is often the case, however, the Post was engaging in demagoguery. The black-white loan disparities are real, although much smaller than the Post would have us believe--and the authors never seriously considered explanations other than racism. They let their biases lead them around by the nose.

For example, the Post study engaged in excessive aggregation, which disguises the truth. If 75 per cent of the people in one neighborhood were of one race, that race defined the area. This means that if an area was 80 per cent white and 20 per cent black, it was defined as white for the purposes of the study. Blacks in this neighborhood were included in the "white community" loan pool. Thus if a middle-class black family got a loan, it appeared as a white loan, and thus contributed to the claim of racism.

The authors claimed to discover race-based differences in "comparable" communities. This suggests that the authors adjusted for factors that banks take into account. But they did not. They looked at and adjusted for overall--but not specific--levels of income, as if your neighbor's salary were what a banker cared about when considering you for a loan. Further, the income data were skewed.

Neither did the authors compare black and white default rates. Writing in Forbes about a Boston Federal Reserve study, Peter Brimelow and Leslie Spencer showed that the default rate on loans by blacks and whites was nearly identical. This seems to mean that bankers were making correct decisions. If they had been using more stringent standards for blacks, blacks should have had lower default rates than whites.

The Post misused other data as well. For example, the story said that the Boston Fed study proved that "minority applicants were 60 per cent more likely to be denied home loans than white applicants." This is nearly true but quite misleading--a trick out of How to Lie with Statistics. The study actually showed that 17 per cent of black mortgage applicants are turned down, compared to 11 per cent of whites. That's a not-too-sensational six-point gap. It's true that 17 per cent is 55 per cent (not 60) more than 11 per cent. And 2 per cent is 100 per cent more than 1 per cent. So what? It still leaves 83 per cent of black applicants successfully receiving loans.

The story also complained about the lack of banks in poor black areas, which "has left a void that is increasingly being filled by check-cashing outlets." One black woman "pays $6 every month to cash her two welfare checks." In fact, this is the market at work. Check-cashing firms can make a profit from people like this, whereas a bank branch could not. Or is the woman supposed to get a mortgage?

Old Story

THIS is not the first time a major newspaper has whipped up racial hysteria on this issue. In 1988, the Atlanta Journal Constitution ran a series concluding (surprise!) that local banks were discriminating. The chief evildoer was Decatur Federal Savings and Loan, one of the largest lenders in the area. The Justice Department followed up with a harassing investigation and concluded that Decatur had violated fair credit laws by not, for example, giving extra consideration and special treatment to black applicants, and by not advertising enough in black media.

The case was "resolved" by a consent decree. Decatur had to hand out $20,000 apiece to black applicants whose loans had been turned down, spend a lot of money in black media, give bonuses to loan officers who made black loans (regardless of defaults), and hold sensitivity training courses for white employees.

For the past three years, the Wall Street Journal has also taken part in this campaign. Its March 1992 study of Federal Reserve data, for example, concluded that banks have systematically discriminated. As the article's lead put it: "When it comes to buying a home, not all Americans are created equal. If you're black, it's twice as likely your mortgage application will be rejected as it is if you're white."