EXAMPLE 8 Discrimination in mortgage lending?

Studies of applications for home mortgage loans from banks show a strong racial pattern: banks reject a higher percentage of black applicants than white applicants. One lawsuit against a bank for discrimination in lending in the Washington DC area contends that the bank rejected 17.5% of blacks but only 3.3% of whites.

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The bank replies that lurking variables explain the difference in rejection rates. Blacks have (on the average) lower incomes, poorer credit records, and less secure jobs than whites. Unlike race, these are legitimate reasons to turn down a mortgage application. It is because these lurking variables are confounded with race, the bank says, that it rejects a higher percentage of black applicants. It is even possible, thinking of Simpson’s paradox, that the bank accepts a higher percentage of black applicants than of white applicants if we look at people with the same income and credit record.

Who is right? Both sides will hire statisticians to examine the effects of the lurking variables. Both sides will present statistical arguments supporting or refuting a charge of discrimination in lending. Unfortunately, there are no formal guidelines for how juries and judges are to assess statistical arguments. And juries and judges need not have any statistical expertise. Lurking variables and seeming paradoxes such as Simpson’s paradox make it difficult for even experts to determine the cause of the disparity in the rejection of mortgage applications. The court will eventually decide as best it can, but the decision may not be based on the statistical arguments.