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Theoretical models argue that home purchase lenders engage in redlining, which involves the downgrading of the creditworthiness of a loan application due to the neighborhood where the property is located. According to these models, economies of scale in the collection of information regarding neighborhood traits influence house values. The existence of these economies of scale is tested using mortgage application data gathered in 1990 and 1991. Findings revealed the presence of major economies of scale in neighborhood lending related to the scale of operation of individual lenders in a neighborhood. However, negative externalities were found associated with the scale of activity of other lenders in the neighborhood. This study estimates that at most 25% of the higher denial rates in low-income and minority communities may be due to the inability of individual lenders to achieve the minimum scale of operation in the neighborhood required to wholly take advantage of the economies of scale.