This paper considers the question of whether inaccurate self-assessment of credit is associated with undesirable financial market outcomes. Our analysis is empirical, and relies on two different datasets—a consumer survey conducted in 2000 by Freddie Mac, and 1.2 million mortgage loans originated in 2004. We find some support for our hypothesis that inaccurate self-assessments lead to increased probabilities of being denied credit, experiencing a “bad” financial event, or having a higher annual percentage rate on a mortgage.
What is disparate impact testing?
Disparate impact testing requires quantitatively testing models for fairness with respect to classes of borrowers protected under the Equal Credit Opportunity...