U.S. Data Reveal Loan Rate Disparity
African Americans and Hispanics are far more likely to receive high-cost home loans than whites -- and although much of the disparity can be tied to economic factors, the reason cannot be fully explained by existing data, according to a government analysis released Tuesday.
The study by the Federal Reserve examined an estimated 80% of all home loans last year. It found that 32.7% of African American borrowers, and 20.3% of Hispanic borrowers, had high-priced loans.
By comparison, 8.7% of white customers and 5.9% of Asian Americans had these higher-cost mortgages, also known as sub-prime loans.
The report said that economic factors, such as the income level of the borrower, were one factor in the disparity.
“More troubling,” the study stated, “these patterns may stem, at least in part, from borrowers being steered to lenders or to loans that offer higher prices than the credit characteristics of these borrowers warrant.”
Fair-lending advocates said the report provided new evidence that minority group members were targeted for sub-prime loans.
John Taylor, president and chief executive of the National Community Reinvestment Coalition, said the report was using “Fed speak” to say “that people of color are significantly more likely to get a higher-cost loan than their white counterparts.”
The report “cannot explain significant racial and ethnic differences that remain between how minorities and whites are treated in terms of high-cost, non-prime loans,” Taylor said.
A federal council, however, cautioned against reading too much into the study.
The data that were used in the study “do not include certain determinants of credit risk that some lenders consider in pricing mortgage loan products, such as the borrower’s credit history ... and consumer debt-to-income ratio,” said the Federal Financial Institutions Examination Council, which compiles data for the Fed and other government agencies.
Some in the mortgage industry have resisted adding such questions to the government survey, however, claiming that such details could potentially compromise borrowers’ privacy and push up lenders’ costs.
Mortgage lenders have long maintained that getting lower-cost prime loans is based on factors such as income and credit history, and not on race.
The new study bolsters that argument by showing that the disparity between whites, blacks and Hispanics diminishes when adjusted for other factors, such as income, said attorney Joseph T. Lynyak III of law firm Reed Smith, whose clients include lenders.
“I think this is a first step in confirming what the mortgage industry has been saying all along,” Lynyak said. “It makes a good-faith effort to apply racially neutral lending across the board.”
The Fed’s analysis was based on data obtained through the Home Mortgage Disclosure Act, which was enacted by Congress in 1975 to combat “redlining,” the refusal of banks to lend in certain communities. At first, lenders were required to report only the number and dollar amount of loans by census tract.
In the late 1980s, the focus turned to whether minorities were denied loans more often than white borrowers because of discrimination, and the disclosure act data expanded to include race, sex and income levels for each loan application, along with whether an application was approved or denied.
Today, the Fed’s attention is on whether race or ethnicity is a factor in the prevalence of sub-prime loans among minority group members. For the first time, the federal government last year required lenders to identify loans with higher interest rates and fees in a bid to gain insight into the rapidly expanding market of sub-prime lending.
Although the Fed has said that nothing in the report proves discrimination on the part of individual institutions, its officials have said the new data may help loan examiners focus on particular regions or types of loans for further scrutiny.
“These new pieces of information allow for a better understanding of lending activity in the higher-priced segment of the home-loan market, a segment that was virtually nonexistent a decade or so ago,” the report said.
The availability of sub-prime loans has made homeownership possible for people who in the past might have been turned down for lack of income or good credit. Industry officials say higher interest rates and fees are needed to cover the greater risk of these loans. Critics, however, say the loans are sometimes marketed in a discriminatory manner to people who might qualify for prime loans.
According to the study, the unexplained difference in sub-prime loans among racial and ethnic groups might have various explanations.
Minority borrowers might have less money to put down and therefore might be drawn to lenders that specialize in sub-prime loans, explaining at least part of the difference. Alternatively, the authors found that “fair lending concerns” would be raised by a situation in which minority borrowers are paying more than they need to, perhaps because lenders offering prime loans don’t market their products in certain neighborhoods.
“Explaining the remaining differences is likely to require more details about such factors as the specific credit circumstances of each borrower, the specific loan products they seek and the business practices of the institutions they approach for credit,” the researchers concluded.
Allen J. Fishbein, director for housing and credit policy at the Consumer Federation of America, said the study clearly pointed to “the need for more rigorous oversight” of the mortgage lending industry.
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Mortgages and race
Blacks are nearly four times as likely as whites to get higher-cost first mortgages. The disparity falls sharply when other factors are taken into account, such as the borrower’s income and whether the lender specializes in sub-prime loans.
Percentage of first-mortgage loans obtained at higher costs
*--* When adjusted When adjusted for Race/ethnicity for borrower lender and borrower of customer factors factors Black 32.4% 26.7% 15.7% Two or more minority races 22.9 22.2 12.2 Hispanic 20.3 16.6 11.6 Native American 18.1 17.2 11.8 Pacific Islander 15.7 16.3 11.1 White 8.7 8.7 8.7 Asian 5.9 7.4 8.1
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Source: U.S. Federal Reserve
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Times staff writer E. Scott Reckard in Orange County contributed to this report.
