Reserve Bank of Boston have published a stinging defense of their 1992 fair-lending study. Lynn Elaine Browne and Geoffrey M.B. Tootell write in the current issue of New England Economic Review that the original study accurately pegged lending-bias problems in the Boston area. They said critics are simply wrong when they claim the 1992 study didn't include enough variables, relied on faulty data and economic models, and isn't supported by other research projects. "We think our findings are really robust," Ms. Browne said Tuesday in an interview. "It is important for people to realize that a lot of the arguments are the same ones being recycled over and over again." The economists said many of their critics are motivated more by politics then academic integrity. "Critics have blasted the study because it has brought lending bias to the forefront," said Ms. Browne, the Boston Fed's director of research and one of the original study's authors. "They are concerned with the attention it is receiving." But James Chessen, chief economist at the American Bankers Association, defended the critiques as honest attempts to advance fair-lending research. "I don't think anyone should accept poor research as fact," Mr. Chessen said. The follow-up studies have dissected the Boston Fed project to determine what worked and what didn't. The 1992 study found that race was a factor in credit decisions by Boston-area banks. That conclusion ignited a firestorm of protest, and is widely seen as making lending-bias prosecutions a priority at the Justice Department. The new rebuttal hasn't mollified the study's No. 1 critic, Anthony Yezer, an economics professor at George Washington University. "At this point, I challenge them," said Mr. Yezer, who has written extensively about lending bias. "Let's take their papers and let's take my papers and send them to the editors of the journals of real estate and finance, and ask them who is right." Mr. Yezer said the economists use a faulty economic model that fails to account for the ability of some borrowers to improve their applications. He said white applicants, who generally have more resources at their disposal, are more likely to avert a rejection this way than minorities. This distorts the overall results, leading to the false conclusion that banks discriminate, he maintained. Mr. Yezer said he plans to confront Mr. Tootell today at a redlining forum in Washington sponsored by the Consumer Federation of America. The Boston Fed economists said they are ready for Mr. Yezer's attack. "Even if these problems do exist, there are ways to get around that problem to adjust for any potential biases," Mr. Tootell said. "So we used these alternative techniques and it doesn't affect our results." The economists added in an applicant's wealth, receipt of financial gifts, and ability to use cosigners, and these factors didn't affect the results as Mr. Yezer suggests, Mr. Tootell said. The economists also refute four other common criticisms. First, they said many critics have tried to discount the 1992 study by showing that minorities default more frequently on mortgages. Ms. Browne said these analyses don't mean anything because they are comparing top executives with janitors. A default study, to work, must examine only similarly-situated borrowers, she said. "You are mixing in people who are very different," said Ms. Browne. "But the Boston Fed study looked at how people in similar situations are treated." Second, the authors defended the variables they based the study on. "There is a lot of talk about omitted variables," said Mr. Tootell, a senior vice president at the Boston Fed. "But it is very hard to come up with any because we have everything on the loan application form." They also refuted charges that the data contains scores of errors. Mr. Tootell said the original Home Mortgage Disclosure Act data did contain mistakes. But those flaws were corrected before they crunched the numbers. Finally, contrary to criticism, they said the study determines that race is a factor in credit decisions. Ms. Browne said she began work on the rebuttal in late 1994 after a flurry a new studies appeared blasting the 1992 project. She said the researchers there wanted to set the record straight. She also said economists need to put the study in context. "The message is not that the banking industry discriminates," she said. "The message is that this is an issue they need to pay attention to. It is not a condemnation but more of a wake-up call."
