THE NATION’S HOUSING : How to Spot Subtle Forms of Loan Discrimination

SPECIAL TO THE TIMES; <i> Distributed by the Washington Post Writers Group</i>

Federal investigators this summer have begun using a new set of tests designed to spot subtle forms of discrimination within mortgage lending institutions that lead to disproportionate application rejections for minority borrowers.

The specific tests haven’t been widely publicized, but are outlined in a technical manual distributed to bank regulatory examiners across the country. One section of the guide, prepared by the comptroller of the currency, shows auditors where and how in the home loan application process discrimination creeps into the equation--accidentally or otherwise. Federal regulators say many of these factors are “virtually invisible” in loan underwriting files because they occur in person-to-person, verbal situations.

They tend to be products of individual loan officers’ unwillingness to be “creative” for applicants, and to take the initiative to solve problems.


Yet hard-to-spot factors like these often spell the difference between successfully getting a mortgage or being turned down along the way. Here are some highlights of the subtle signs that federal examiners will now be looking for inside bank lending departments. Though discriminatory mortgage practices tend to affect African-Americans, Latinos, and Native Americans primarily, say regulators, they will be alert to problems with other groups of borrowers as well.

Application obstacles. How a loan officer deals with household income or employment issues that arise during the application process can be crucial. For example, when an applicant doesn’t quite meet a specific credit underwriting standard, the loan officer can either solicit “compensatory factors” from the borrower or can simply not bring it up. From federal studies, say regulators, evidence exists that minority applicants are less likely to be pressed for compensatory factors than white borrowers. That’s one key reason they get rejected more frequently.

What are these factors? Borrowers typically haven’t the slightest idea they even exist. Say, for instance, the mortgage you’re seeking requires a monthly payment that puts you over the bank’s limits on debt-to-income ratios. With a little sympathetic prodding, however, the loan officer might be able to elicit some additional information that counterbalances the income-ratio problem.

Perhaps you as an applicant have demonstrated over the past couple of years an “ability to devote a greater portion of income” to housing or other expenses than the regular standards assume. If so, your application could go forward.

Perhaps you have a “probability of increased earnings” that hadn’t been reflected in the formal application. Or “compensation not reflected in your effective income”--the W-2 stubs attached to your loan application--that directly affects your ability to pay the mortgage.

If a loan officer doesn’t affirmatively go searching for “compensatory factors” like these for minority applicants, but routinely--even unconsciously--does so for white applicants, illegal discrimination may be involved, say regulators.


Discretionary factors. Loan officers commonly have wide discretionary powers in evaluating one application versus another. Say, for example, that your income comes from several different sources or jobs, including part-time work, child support or public assistance. The loan officer has the underwriting responsibility of classifying those income streams as “expected to continue” or “temporary” or “unstable.” If you’re a minority applicant with the identical total monthly income from combined sources as a white applicant, you may be at greater risk of having some of that income defined as temporary or unstable--thanks to a “discretionary” call by your loan officer.

The same is true on a long list of subtle factors, such as how the loan officer interprets the bank’s rules on gifts to cover closing costs, co-borrower provisions, rental income as part of household income and frequency of job changes. Patterns of decision-making that show even slightly greater generosity to white applicants over minorities may be illegal.

Credit history inquiries. How a loan officer handles “marginal” calls connected with your credit background can also display discriminatory red flags. Does he or she ask you for detailed explanations of derogatory information contained in your credit report? If you are asked for explanations, does the loan officer then actually follow up and check them out? If you’ve had a business failure or bankruptcy sometime in the past, does the loan officer ask you whether there were conditions or circumstances involved that were beyond your control? (Regulators are looking for subtle patterns where minority applicants rarely are asked about extenuating factors, but whites are regularly asked.)

If your application is rejected on credit history grounds, does the loan officer tell you how to contact the credit agency to get additional details or to correct your credit report? (When minority applicants aren’t told that, but white applicants are, that’s a tip-off that the loan officer may be violating fair lending practices.)

What do you do if you spot one or more signs of subtle discrimination in the course of your mortgage application? First, point it out to the lender, offering as much detail or documentation as you can muster. If that doesn’t work, contact state or federal regulators who oversee the particular type of lender you’re dealing with. Or contact the nearest regional office of the federal Department of Housing and Urban Development, requesting fair housing form HUD-903 to file a complaint.