An investigation has found that lenders in 2019 were more likely to deny home loans to people of color than to white people with similar financial characteristics.
— even when we controlled for newly available financial factors the mortgage industry for years has said would explain racial disparities in lending.This story was reported by The Markup, and the story and data were distributed by The Associated Press.
We found that lenders gave fewer loans to Black applicants than white applicants even when their incomes were high — $100,000 a year or more — and had the same debt ratios. In fact, high-earning Black applicants with less debt were rejected more often than high-earning white applicants who have more debt.
In written statements, the ABA and MBA criticized The Markup’s analysis for not including credit scores and for focusing on conventional loans only and not including government loans, such as those guaranteed by the Federal Housing Administration and Department of Veterans Affairs. When the CFPB first proposed expanding mortgage data collection to include the very data that industry trade groups have told us is vital for doing this type of analysis — credit scores, debt-to-income ratio, and loan-to-value ratio — those same groups objected. They didn’t want the government to even collect the data, let alone make it public. They cited the risk of a cyberattack, which could reveal borrowers’ private information.
Black applicants in Chicago were 150% more likely to be denied by financial institutions than similar white applicants there. Lenders were more than 200% more likely to reject Latino applicants than white applicants in Waco, Texas, and to reject Asian and Pacific Islander applicants than white ones in Port St. Lucie, Florida. And Native American applicants in Minneapolis were 100% more likely to be denied by financial institutions than similar white applicants there.
Who makes these loan decisions? Officially, lending officers at each institution. In reality, software, most of it mandated by a pair of quasi-governmental agencies. This algorithm was developed from data from the 1990s and is more than 15 years old. It’s widely considered detrimental to people of color because it rewards traditional credit, to which white Americans have more access. It does not consider, among other things, on-time payments for rent, utilities, and cellphone bills — but will lower people’s scores if they get behind on them and are sent to debt collectors.
“A lot of things that minorities and underserved borrowers are doing, responsible financial behaviors, are going under the radar,” said Scott Olson, executive director of CHLA, a trade group representing small and midsized independent mortgage lenders. Fannie’s and Freddie’s approval process also involves other mysterious algorithms: automated underwriting software programs that they first launched in 1995 to much fanfare about their speed, ease and, most important, fairness.
Research has shown that payday loan sellers usually place branches in neighborhoods populated mainly by people of color, where bank branches are less common. As a result, residents are more likely to use these predatory services to borrow money. This creates lopsided, incomplete credit histories because banks report both good and bad financial behavior to credit bureaus, while payday loan services only report missed payments.
Not even home valuations are free from controversy. The president of the trade group representing real estate appraisers, who determine property values for loans, recently acknowledged that racial bias is prevalent in the industry and launched new programs to combat it. No one outside Fannie and Freddie knows exactly how the factors in their underwriting software are used or weighted; the formulas are closely held secrets. Not even the companies’ regulator, the FHFA, appears to know, beyond broad strokes, exactly how the software scores applicants, according to Stevens, who served as Federal Housing commissioner and assistant secretary for housing at HUD during the Obama administration.
Scott Olson, executive director of CHLA, said there’s no good reason to keep lenders in the dark: “The more transparent, the more clear the guidance is, the easier it is for borrowers to know what they need to do to be in a position to qualify.” When we examined the decisions by individual lenders, many denied people of color more than white applicants. An additional statistical analysis showed that several were at least 100% more likely to deny people of color than similar white borrowers. Among them: the mortgage companies owned by nation’s three largest home builders.
Another key housing law, the federal Community Reinvestment Act of 1977, allows the federal government to penalize lenders who fail to invest in low-income or blighted neighborhoods but makes no requirements regarding borrowers’ race. Stein’s group has lobbied for the law to be reformed. “As an industry, we need to think about, what are the less discriminatory alternatives, even if they are a valid predictor of risk,” said David Sanchez, a former Federal Housing Finance Agency policy analyst who currently directs research and development at the nonprofit National Community Stabilization Trust. “Because if we let risk alone govern all of our decisions, we are going to end up in the exact same place we are now when it comes to racial equity in this country.
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