Some Evidence on Non-Profit Maximizing Behavior in Credit Markets.

We develop a model of discrimination by creditors in credit markets, where discrimination is motivated by either profit maximization or prejudice against minorities. The model implies that for the "over-qualified" debtors, if loans to minority debtors have lower conditional expected write-offs than loans to majorities, then there exists prejudice against minorities. This implication hold for both monopolistic and perfect competitive markets. Empirical evidence from a dataset of FHA mortgage loans shows that for the "over-qualified" debtors, loans to minority debtors appear to have lower conditional expected write-offs than loans to majorities given other exogenous variables observed at the time of loan originations. However, the estimates are not statisically significant. Hence, we can not reject the null hypothesis of non-existence of prejudice against minorities. Issues of data limitations are also addressed.