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What We Know About Mortgage
Lending Discrimination In America

Executive Summary

Owning a home in a neighborhood of one choice is a major aspect of the American dream. Owning a home is one of the primary ways of accumulating wealth in our society. There is also evidence that& -by creating a greater stake in the neighborhood&-homeownership increases a people’s willingness to invest in community problem-solving. And homeownership is even known to increase people’s overall sense of well-being.

Yet not all Americans enjoy equal access to the benefits of homeownership, in part because of unequal access to capital. Minorities are less likely than whites to obtain mortgage financing and, if successful in obtaining a mortgage, tend to receive less generous loan amounts and terms.

Prepared for the U.S. Department of Housing and Urban Development (HUD) by the Urban Institute, this report provides a comprehensive review and re-analysis of the best available evidence on possible discrimination by mortgage lenders. It provides an up-to-date summary of what we know&-and outlines what we need to know&-about mortgage lending discrimination in America.

Beginning with an overview of the principal stages in the mortgage lending process (advertising and outreach by lenders, pre-application inquiries by prospective borrowers, loan approval or denial, and loan administration), this report concludes that minority homebuyers in the United States do face discrimination from mortgage lending institutions, although important gaps remain in what we know. The major findings of this report are:

FINDING #1. Discrimination can begin at the early stages of the mortgage lending process, including pre-application inquiries by would-be borrowers. This analysis reviewed results from HUD-funded "paired testing" that was carried out in selected cities. Testers of different races, who were matched on credit history and other traits, approached lenders with the same types of mortgage needs. Overall, minorities were less likely to receive information about loan products, received less time and information from loan officers, and were quoted higher interest rates in most of the cities where tests were conducted.

FINDING #2. At later stages of the process, racial disparities in loan denial rates cannot be "explained away" by differences in creditworthiness or by technical factors affecting the analyses. Statistical re-analysis of data assembled by the Federal Reserve Bank of Boston (data that include measures of creditworthiness and other important factors) finds large differences in loan denial rates between minority and white applicants, and these differences cannot be explained away by data or statistical problems asserted by prior critics of the "Boston Fed" study. This analysis presents substantial evidence that discrimination exists, shifting the "burden of proof" to those who would argue that these differences are entirely due to racially neutral underwriting criteria.

FINDING #3. Good intentions&-on the part of lenders&-are not enough.
In-depth examination of the mortgage loan origination process from an individual lender’s perspective suggests that even among institutions with good intentions, and where loan officers take pride in working with borrowers who need more help on loan applications, minority customers may not be receiving equal treatment. The evidence on organizational change suggests that achieving significant reductions in lending discrimination may require such changes in business practices as: improving employee awareness of and attitudes toward fair lending obligations; making the "business case" for fair lending and its importance to the firm; implementing clear incentives that support change; monitoring employee performance on fair lending; tackling underwriting standards that have disproportionate, negative effects on minorities but serve no clear business purposes; and more.

This report concludes by recommending priority next steps in measuring mortgage discrimination and developing policies and practices to better combat it. These recommendations include:

  • Expanded research on lender decisions about office locations, advertising and outreach, and referrals that may discourage minorities from ever applying for loans with some institutions;
  • Stepped-up testing at the pre-application stage and possibly the loan approval stage as well, for research, enforcement, and self-assessment by lenders themselves;
  • Replication and enhancement of the methodology employed by the Boston Fed in new, nationwide studies of mortgage lending, including systematic analysis of mortgage loan performance to determine the "business necessity" of lending criteria and procedures that disproportionately disadvantage minorities;
  • Expanded research on loan terms and conditions, including objective examination of relatively recent market trends such as risk-based pricing and credit-scoring formulas, as well as analysis of overages and fees; and
  • Rigorous evaluation of fair lending "best practices" to find out what really works to increase lending to traditionally under-served groups.

Lending institutions particularly need tools that they can use to monitor and assess their own anti-discrimination efforts. While the "stick" of litigation or regulatory action creates important incentives for lenders to care about the potential for discrimination in their policies and procedures, lenders cannot take action if they do not realize that they are discriminating. Neither regulators nor fair housing groups have sufficient resources to investigate all lending institutions. Self-testing is one important strategy that lenders can use to monitor their performance and identify any problems that may exist.

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Content Archived: January 20, 2009

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