What We Know About Mortgage
Lending Discrimination In America
Stage 2: Pre-application Inquiries
The second important stage in the mortgage lending process encompasses the
information and encouragement people receive when they call or visit a
lender's office to inquire about mortgage loan terms and conditions. Do
minorities and whites receive different levels of service and assistance? Are
they given different amounts or types of information? Are they told they may
qualify for different types of loans? Do they receive different degrees of
encouragement and help in understanding how to overcome barriers to application
Existing knowledge about lender behavior at this stage comes primarily from
paired testing (also known as fair lending audits). Testing has been widely used
for analytic as well as investigative studies of discrimination by landlords and
real estate agents. But only a few relatively small-scale investigative
studies--primarily by the National Fair Housing Alliance (NFHA)--have
been applied to mortgage lending.
The NFHA audits, funded by the U.S. Department of Housing and Urban
Development's Fair Housing Initiatives Program (FHIP), were conducted by
fair housing enforcement organizations using testers who posed as first-time
homebuyers and refinancers at the pre-application stage. Testers, matched on
ratios that relate a household's income and debts to the desired loan
amount, visited lenders in person to inquire about the types and terms of loans
for which they might qualify. After each visit, testers answered a set of
closed-ended questions and wrote extensive narratives about their experiences.
NFHA conducted tests in seven cities (Atlanta, Chicago, Dallas, Denver, Detroit,
Oakland, and Richmond), with about two-thirds of the tests concentrated in
Chicago and Oakland.
NFHA concluded that lenders often appeared to be less interested in giving
information to black customers than to whites; that they urged black customers,
but not whites, to go to another lender; and emphasized to black customers, but
not whites, that application procedures would be long and complicated. According
to these investigative audits, blacks were also more likely than equally
qualified whites to be told that they did not qualify for a mortgage (before
they had filed a formal application), and whites were more likely to be
"coached" on how best to handle potentially problematic aspects of
their credit profile.
Given their purpose, NFHA's tests were not designed to produce
statistically valid measures of the incidence of discrimination across lenders
or markets. In fact, NFHA's method for selecting lenders was structured
specifically to build evidence for potential litigation. In Oakland and Chicago,
the original two cities for the testing project, an initial target group of
lenders was selected based on market share and lending performance data
suggesting inferior treatment of minority applicants and minority neighborhoods.
Follow-up tests were conducted for lenders where evidence of differential
treatment was found on the first visit, and lenders tested in the other five
sites were selected based on findings of discrimination from the tests in
Oakland and Chicago. Thus, the resulting sample of tests cannot be interpreted
to reflect the incidence of discrimination in these cities or the Nation as a
whole, because it skews the sample toward likely discriminators in a way that
cannot be replicated or accounted for by statistical weights.
Despite these limitations, NFHA gave the Urban Institute access to data from
a large number of the tests they conducted, enabling researchers to construct a
database of statistically tractable information. Specifically, researchers
extracted a limited number of closed-ended information items from the NFHA test
reports for 150 paired tests. This data set provides the opportunity to learn
more from a research perspective about the presence and forms of discrimination
at the pre-application stage. Exhibit 2 summarizes key findings from the Urban
Institute analysis of these data. It is important to keep in mind that the
findings reported here apply only to the specific sample of lenders tested by
NFHA, which were selected in large part because they had already shown signs of
potential discriminatory behavior.
The most basic measure of service at the pre-application stage is whether or
not a tester is seen by a lender and given information about specific loan
products. In four of the five cities in the re-analysis data set,
African-American testers were more likely to be denied such information than
white testers. In Chicago and Atlanta the difference was statistically
significant. Moreover, in four of the five test cities lenders spent more time
with white than with minority testers. In Atlanta the disparity in favor of
whites averaged 27 minutes, in an interaction that averaged 62 minutes (for
whites). Oakland was the exception city, where loan officers spent significantly
more time with black testers. Not only did lenders spend more time with whites,
in three of five cities, they provided whites with information about more
possible loan products.
What about the loan products? The information available does not support
detailed comparisons of the terms and conditions offered to whites and blacks,
but it does indicate which testers were quoted a product with a 30-year term.
Comparing the interest rates quoted for these 30-year mortgages reveals that
African-American testers were more likely to be quoted higher interest rates
than their white counterparts in three of the five cities. In Atlanta the
difference was statistically significant. In only one city (Richmond) were
whites quoted higher rates than blacks.
A notable feature of the paired test results is their regional variation.
Although several treatment variables show the same general pattern across
cities, differences between cities are substantial. This is particularly
striking because the two cities with the most tests--Chicago and
Oakland--yield opposite results. In Chicago all the statistically
significant findings were unfavorable to black testers, while in Oakland,
differences in treatment were rarely significant and, when they were, they often
benefited African-American testers. This contrast highlights the need to better
understand regional differences in mortgage lending practices and in the
incidence and forms of lending discrimination.