Re: Redlining

From:	IN%"mjmiski@execpc.com"  "Matthew J. Miszewski" 11-DEC-1996 03:52:03.23

>This is the essence of, at least, my disagreement with you Red.  I dont
>agree that redlining doesnt harm people.  You see no harm.  I do.

	Of course redlining causes harm to those who are redlined... they
can't get credit. But the same can be said of any system of keeping
track of who is likely to repay credit; it means that someone who has
defaulted on past loans won't get future ones. Quite simply, while I
would agree with you that racism certainly persists (it would be
difficult for me to grow up in the South and not see this), I would
argue that you have no evidence for that the basic motivation behind
redlining is that the people in such areas are less likely to repay
credit.
	-Allen

E. Allen Smith wrote:
> 
> From:	IN%"mjmiski@execpc.com"  "Matthew J. Miszewski" 11-DEC-1996 03:52:03.23
> 
> >This is the essence of, at least, my disagreement with you Red.  I dont
> >agree that redlining doesnt harm people.  You see no harm.  I do.
> 
> 	Of course redlining causes harm to those who are redlined... they
> can't get credit. But the same can be said of any system of keeping
> track of who is likely to repay credit; it means that someone who has
> defaulted on past loans won't get future ones. Quite simply, while I
> would agree with you that racism certainly persists (it would be
> difficult for me to grow up in the South and not see this), I would
> argue that you have no evidence for that the basic motivation behind
> redlining is that the people in such areas are less likely to repay
> credit.
> 

The problem is, people can choose what credit history they want to have
(I can be a saver or a spender, for example), but nobody can change the
color of their skin.

This is central point of the theory why discrimination based on credit
histories is OK, while the discrimination based on race is not.

	- Igor.

At 11:31 AM -0400 12/11/96, E. Allen Smith wrote:
>From:	IN%"mjmiski@execpc.com"  "Matthew J. Miszewski" 11-DEC-1996 03:52:03.23
>
>>This is the essence of, at least, my disagreement with you Red.  I dont
>>agree that redlining doesnt harm people.  You see no harm.  I do.
>
>	Of course redlining causes harm to those who are redlined... they
>can't get credit. But the same can be said of any system of keeping
>track of who is likely to repay credit; it means that someone who has
>defaulted on past loans won't get future ones. Quite simply, while I
>would agree with you that racism certainly persists (it would be
>difficult for me to grow up in the South and not see this), I would
>argue that you have no evidence for that the basic motivation behind
>redlining is that the people in such areas are less likely to repay
>credit.

Whether to offer credit to some entity is, like many other such
transactions, an economic transaction which involves a number of factors:
interest rates charged, other uses for the money, expectation of payback,
government interference (distortions of markets), etc.

As with insurance in all its various forms, the decision process involves
_probabalistic assessments_ based on avialable information, such as from
past payback data, actuarial tables, the legal system, etc. By the nature
of such probabalistic assesments, certain "lumped" categories will have to
be used: age groups, sex, For example, here are just some obvious areas to
consider:

- age -- if under-25 persons have a 20% higher default rate on loans, "for
whatever reason," this will be a factor in setting rates or even in
granting a loan

- sex -- if women are generally twice as likely to repay a loan, this will
be a factor

- ethnicity -- if persons of Norwegian heritage are 4 times less likely to
default on a loan than persons of Blatislavan heritage are, a loan officer
would factor this in (absent government market distortions)

- education -- if college-educated persons are less likely to default than
high school dropout, etc.

...and so on...one could make a list of several dozen categories, then run
correlation tests of various sorts. This is clearly what banks and other
lenders do in establishing loan criteria.

Nothing new here.

What is lost on many people who denounce "racism" and demand that banks
give equal percentages of banks to various allegedly aggrieved "oppressed
minorities," based on various quotas, is that the loan process is almost
totally driven by _greed_, as it should be. Any bank which practices
"stupid racism," e.g, by ignoring good payback prospects because of
tangential or unimportant criteria, faces lost business.

That the composite effect of lending criteria studies is that relatively
few inner city blacks who failed to graduate from high school and who have
menial jobs are offered credit is not a function of racism, but of these
correlation studies.

Sometimes other criteria can become domiant, such as "loss of face" in
Asian cultures if a loan is defaulted upon, especially a loan made by other
members of one's ethnic community. This explains the success of the private
lending pools many Asian communities have.

Blacks who feel "discriminated against" would do well to emulate this
example, instead of demanding that Massah in the Big House fix things for
them by government distortion.

(Note that one way commercial banks have of avoiding the problem of quotas
on loan applications is to simply not have offices in inner cities or other
areas of poor credit prospects. This has been one of the main effects of
government distortions of free markets in credit.)

--Tim May

Just say "No" to "Big Brother Inside"
We got computers, we're tapping phone lines, I know that that ain't allowed.
---------:---------:---------:---------:---------:---------:---------:----
Timothy C. May              | Crypto Anarchy: encryption, digital money,
tcmay@got.net  408-728-0152 | anonymous networks, digital pseudonyms, zero
W.A.S.T.E.: Corralitos, CA  | knowledge, reputations, information markets,
Higher Power: 2^1398269     | black markets, collapse of governments.
"National borders aren't even speed bumps on the information superhighway."

Timothy C. May wrote:
> What is lost on many people who denounce "racism" and demand that banks
> give equal percentages of banks to various allegedly aggrieved "oppressed
> minorities," based on various quotas, is that the loan process is almost
> totally driven by _greed_, as it should be. Any bank which practices
> "stupid racism," e.g, by ignoring good payback prospects because of
> tangential or unimportant criteria, faces lost business.

Please correct me, but your representation of what such people demand
is totally wrong.

No one demands that blacks should be given as much loans as whites.

The idea of equal opportunity is that people of equal standing (ie,
people with similar credit histories, incomes, levels of savings, and
so on) be given same consideration regardless of race.

Example: Suppose Mr. White makes $50,000 a year, has 3 credit cards and
has never defaulted on anything. Suppose Mr. Black makes $50,000 a year,
has 3 credit cards and has never defaulted on anything. The law, as I 
understand it, required that they both must be treated equally.

Understanding of that definition of discrimination by many laypeople is
simply distorted by the fact that blacks, on average, have lower incomes
due to many factors, of which many are often their own fault. Since
incidence of poor credit standing is higher among blacks, the average
amount of loans received by blacks is _not an evidence of discrimination_,
at least it should not be to reasonable people.

There are other issues when some demand that there should be programs
helping blacks (or any other category) achieve higher income. These
programs are separate issue from what we are discussing.

Also, some posters here mix totally different issues: 1) what is 
discrimination and 2) should the government do anything about it
or not.

	- Igor.

"Timothy C. May" <tcmay@got.net> writes:
> Whether to offer credit to some entity is, like many other such
> transactions, an economic transaction which involves a number of factors:
> interest rates charged, other uses for the money, expectation of payback,
> government interference (distortions of markets), etc.
>
> As with insurance in all its various forms, the decision process involves
> _probabalistic assessments_ based on avialable information, such as from
> past payback data, actuarial tables, the legal system, etc. By the nature
> of such probabalistic assesments, certain "lumped" categories will have to
> be used: age groups, sex, For example, here are just some obvious areas to
> consider:
>
> - age -- if under-25 persons have a 20% higher default rate on loans, "for
> whatever reason," this will be a factor in setting rates or even in
> granting a loan
>
> - sex -- if women are generally twice as likely to repay a loan, this will
> be a factor
>
> - ethnicity -- if persons of Norwegian heritage are 4 times less likely to
> default on a loan than persons of Blatislavan heritage are, a loan officer
> would factor this in (absent government market distortions)
>
> - education -- if college-educated persons are less likely to default than
> high school dropout, etc.
>
> ...and so on...one could make a list of several dozen categories, then run
> correlation tests of various sorts. This is clearly what banks and other
> lenders do in establishing loan criteria.

As usual, Timmy May spouts racist, anti-Semitic shit. As usual, he has
no idea what he's talking about. So what else is new...

The interest that a bank charges on a commercial loan can be thought of as
three components: a chunk to offset the anticipated effects of inflation;
a chunk that goes into a "bad debt" reserve; and a chunk that's the economic
revenue of the bank.

Imagine that a bank could set its loan rates freely, without the government
distorting the market. Two Brooklyn Jews (the kind of people Timmy May hates
with a vengeance and wants dead :-) apply for $50K loans to open little grocery
stores. The only difference is that Jew 1 (let's call him Abram) wants to open
his store in Park Slope (inhabited by Jewish Lesbians) and Jew 2 (Baruch) wants
to open his store in Morningside Heights (Blacks, Hispanics, a few Columbia
University students). The loan officer would consider the fact that Baruch's
business venture is much riskier that Abram's and charge Baruch a higher
interest rate to offset the higher risk of the default. If the banks writes a
lot of such loans, then on the average they'll have the same profit from all of
them. Think of this as the higher life insurance premiums smokers pay - they
don't add anything to the insurance company's profits. If Baruch thinks the
bank charges him too much for the added risk, he can go to another bank - there
are plenty of them.

Now consider the distorted market where a bank can't charge Abram and Baruch
different rates as determined by the free market. The bank knows precisely how
risky each loan is, but is not allowed to use this knowledge. Instead the bank
tries its best to avoid giving the loan to Baruch, because this loan would be
riskier than the equalized interest rate makes it worth. Baruch can't open a
store.* Baruch and his potential customers suffer. The bank is forced to write
some Baruch loans (fewer than it would in the previous paragraph), so it tries
to charge Abram higher rates that in the previous paragraph to offset the
losses on Baruch loans. Abram passes on some of this higher interest to his
customers. Abram and his customers suffer. Another bank might be more
successful in fending off Baruch's loan application, so it'll offer Abram a
lower interest rate, and he'll patronize that bank. Thus "socially undesirable"
behavior is rewarded. Finally, banks that don't give loans to Baruch do less
business overall, earn less profit, and their owners (shareholders) suffer.
(But they'd suffer even more of their banks loaned money to Baruch at the
same rate as to Abram, of course.)

--
* What happens in real life is - Baruch goes to another institution that issues
loans at much higher interest rates than a regular bank (often just below the
usury cap, or above if it's an unregular loan shark). Abram is welcome to
borrow there too, but he doesn't have to. The institution effectively
specializes in loans to businesses that can't obtain loans at regular lending
institutions through setting a high interest rate.

---

Dr.Dimitri Vulis KOTM
Brighton Beach Boardwalk BBS, Forest Hills, N.Y.: +1-718-261-2013, 14.4Kbps

At 12:43 PM -0600 12/11/96, Igor Chudov @ home wrote:
>
>The problem is, people can choose what credit history they want to have
>(I can be a saver or a spender, for example), but nobody can change the
>color of their skin.
>
>This is central point of the theory why discrimination based on credit
>histories is OK, while the discrimination based on race is not.

But of course one also cannot change one's gender, age (except by waiting),
or national origin, marital status (at least not easily), etc. and yet
these often offer correlation data on expectation of payback.

(If they do, they do. If they don't, they don't. My point is not to argue
for these factors, or how a lender might want to weight them, only to note
that many such criteria are in fact not changeable by the applicant for
credit (or insurance, or a rental, etc.).)

Personally, of course, I reject the notion that lenders of money or renters
of property should be told by men from the government that they may not
take into the gender, ethnicity, age, marital status, etc. of applicants.

The knee-jerk demonization of "racism" and "discrimination" in this society
needs reexamination. No, I'm not arguing _in favor_ of simplistic notions
that the color of one's skin is critical. Rather, it's clearly important
for _some_ decisions, as we all know whether we admit it or not.

--Tim May

Just say "No" to "Big Brother Inside"
We got computers, we're tapping phone lines, I know that that ain't allowed.
---------:---------:---------:---------:---------:---------:---------:----
Timothy C. May              | Crypto Anarchy: encryption, digital money,
tcmay@got.net  408-728-0152 | anonymous networks, digital pseudonyms, zero
W.A.S.T.E.: Corralitos, CA  | knowledge, reputations, information markets,
Higher Power: 2^1398269     | black markets, collapse of governments.
"National borders aren't even speed bumps on the information superhighway."

Timothy C. May wrote:
> 
> At 12:43 PM -0600 12/11/96, Igor Chudov @ home wrote:
> >
> >The problem is, people can choose what credit history they want to have
> >(I can be a saver or a spender, for example), but nobody can change the
> >color of their skin.
> >
> >This is central point of the theory why discrimination based on credit
> >histories is OK, while the discrimination based on race is not.
> 
> But of course one also cannot change one's gender, age (except by waiting),
> or national origin, marital status (at least not easily), etc. and yet
> these often offer correlation data on expectation of payback.
> 

Correlation is not an evidence of discrimination, at least to me.

See my another post.

You need to do a cross-sectional analysis to find out whether
discrimination takes place.

I would appreciate if some attorney on this list shed some light on the
legal definition of discrimination.

Thanks.

	- Igor.

At 5:07 PM -0600 12/11/96, Igor Chudov @ home wrote:

>Correlation is not an evidence of discrimination, at least to me.
>

Nor is it to me. So neither of us will likely object to the neural
net-based lending programs which feed in a bunch of applicant data points,
train the net by providing feedback on who repaid their loans and with what
complications, etc. Even if such nets end up rejecting
"otherwise-qualified" (a la your other post) applicants in such a way that
the accept/reject ratios appear strongly correlated with certain
ethnicities?

(Another member of the list sent me private e-mail about his experiences
writing a "scoring program" for a bank making just the kinds of loans we're
talking about here. He recounted his bank's very real experiences with loan
paybacks by various ethnic and national groups. Nothing very surprising, to
me.)

--Tim May

Just say "No" to "Big Brother Inside"
We got computers, we're tapping phone lines, I know that that ain't allowed.
---------:---------:---------:---------:---------:---------:---------:----
Timothy C. May              | Crypto Anarchy: encryption, digital money,
tcmay@got.net  408-728-0152 | anonymous networks, digital pseudonyms, zero
W.A.S.T.E.: Corralitos, CA  | knowledge, reputations, information markets,
Higher Power: 2^1398269     | black markets, collapse of governments.
"National borders aren't even speed bumps on the information superhighway."

Timothy C. May wrote:
> At 5:07 PM -0600 12/11/96, Igor Chudov @ home wrote:
> >Correlation is not an evidence of discrimination, at least to me.
> >
> 
> Nor is it to me. So neither of us will likely object to the neural
> net-based lending programs which feed in a bunch of applicant data points,
> train the net by providing feedback on who repaid their loans and with what
> complications, etc. Even if such nets end up rejecting
> "otherwise-qualified" (a la your other post) applicants in such a way that
> the accept/reject ratios appear strongly correlated with certain
> ethnicities?
> 
> (Another member of the list sent me private e-mail about his experiences
> writing a "scoring program" for a bank making just the kinds of loans we're
> talking about here. He recounted his bank's very real experiences with loan
> paybacks by various ethnic and national groups. Nothing very surprising, to
> me.)

My readings on neural nets made an impression that they are not
necessarily good at all.

	- Igor.

At 10:38 PM -0600 12/11/96, Igor Chudov @ home wrote:
>Timothy C. May wrote:
>> At 5:07 PM -0600 12/11/96, Igor Chudov @ home wrote:
>> >Correlation is not an evidence of discrimination, at least to me.
>> >
>>
>> Nor is it to me. So neither of us will likely object to the neural
>> net-based lending programs which feed in a bunch of applicant data points,
>> train the net by providing feedback on who repaid their loans and with what
>> complications, etc. Even if such nets end up rejecting
>> "otherwise-qualified" (a la your other post) applicants in such a way that
>> the accept/reject ratios appear strongly correlated with certain
>> ethnicities?

>My readings on neural nets made an impression that they are not
>necessarily good at all.
>

Hardly my point, Igor.

Oh well, I guess it's pointless.

--Tim May


Just say "No" to "Big Brother Inside"
We got computers, we're tapping phone lines, I know that that ain't allowed.
---------:---------:---------:---------:---------:---------:---------:----
Timothy C. May              | Crypto Anarchy: encryption, digital money,
tcmay@got.net  408-728-0152 | anonymous networks, digital pseudonyms, zero
W.A.S.T.E.: Corralitos, CA  | knowledge, reputations, information markets,
Higher Power: 2^1398269     | black markets, collapse of governments.
"National borders aren't even speed bumps on the information superhighway."