Are Mortgage Lenders Racist?

by Howard Fienberg
October 1, 2002

Do American lending institutions racially discriminate? "The Great Divide 2002," a study released on Tuesday by the advocacy group Association of Community Organizations for Reform Now (ACORN) seems to suggest just that. According to ACORN, Latinos are denied mortgage loans one and half times more often than whites and African Americans are rejected more than twice as often as whites. The organization's president, Maude Hurd, declared that "these disparities are growing year by year" and the problem is "not going away."


Is there more to this disparity than a legacy of racism? Mortgage institutions are forbidden from asking applicants about their race. Few, if any, lenders ever know the race of their applicants, having just names or social security numbers to attach to the financial information with which they are supplied. In addition, creditors are paid by volume and it is unlikely that they would turn away money from anyone due to race.


So if overt discrimination is not the problem, why might minorities have a harder time obtaining mortgages? Perhaps they have poorer credit histories. Applicants' credit histories are usually the biggest factor in assessing whether or not they get a loan. Credit histories, which are used to determine credit "scores," are impacted by income, but also by other socio-economic factors, like marital status and savings habits. Fannie Mae, the huge quasi-governmental company which markets mortgage-backed securities, has found that minority renters have less income, less net wealth, and lower credit scores, supporting a possible link between minority status and credit history.


Some analysts suspect that credit scoring formulas unintentionally bias minority borrowers. Not everyone from the same income bracket can achieve the same credit ratings. Additionally, credit scores are based on lending practices more prevalent in white communities, such as home-equity loans, and more readily accessed when compiling credit histories. Meanwhile, credit scoring assigns little or no merit to good payment records of sub-prime loans, community group loans, or local finance company deals, all of which are more common in minority communities. Some sub-prime lenders may even withhold good payment records in order to discourage customers from refinancing at lower rates. ACORN appropriately acknowledges that lower-income minority individuals may choose sub-prime deals because they are unaware of the alternatives.


The complexities aside, it is not unreasonable to suspect some racial problems in general lending practices. As Mark Thompson of Washington State's Department of Financial Institutions puts it, discrimination in other areas of society may "bleed into" lending. Indeed, it is naive to presume that subtle forms of discrimination borne out of individual prejudices are completely extinct. But not every obvious racial disparity necessarily results from racial discrimination. Rather, it appears that poor credit histories among minorities and a lack of education about mortgage lending are the real factors responsible for minorities receiving fewer loans than whites.


Nonetheless, ACORN's data show much room for optimism. Conventional mortgage denial rates declined for borrowers of all races between 2000 and 2001. ACORN struggled to find a cloud in this silver lining - denial rates for white borrowers fell faster than those for Latinos and African Americans. While the number of Latino mortgages granted increased from 2000 to 2001, mortgages to whites stayed the same and those to African Americans shrank. But ACORN's report also shows that over the long term, from 1996 to 2001, the number of granted mortgages increased for all groups, with Latinos and African Americans benefiting far more than whites.


Whether or not their lending difficulties stem from residual injustices, minority borrowers deserve real solutions. Of course, if ACORN's trend data hold true, fewer and fewer people may need those solutions in the future.

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