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Broker Kickbacks Are Gouging Minority Borrowers

Friday, September 8, 2006

The Federal Reserve today released figures showing once again that African-Americans and Latinos pay more for mortgages than white borrowers. Data collected from lenders for 2005 show that a majority of loans (52%) to African-Americans and more than one in three loans (40%) to Latinos were higher-cost. White borrowers received a much lower portion of higher cost loans, only one in five, or 19%.

Some lenders and their lobbyists will claim that these disparities occur because minorities pose higher financial risks and so get charged more for a loan.

The Center for Responsible Lending, which fights predatory lending, had its doubts.

So, in the largest study of its kind, last spring we looked at borrowers in the subprime mortgage market, which targets people with impaired credit and found something shocking: African-American and Latinos were more than 30 percent more likely to pay more for mortgages than whites.

"As the HMDA numbers continue to demonstrate, racial and ethnic discrimination are still rampant in our nation's mortgage lending practices. Continuing inequality, most prominently predatory lending, is a major civil rights issue of our day," said Hilary Shelton, the director of the NAACP Washington Bureau.

How does this happen? We - and many housing experts - suggest there's another reason for these racial and ethnic disparities: yield-spread premiums, or YSPs. That's what the industry calls them. We call them kickbacks. Lenders pay these kickbacks to mortgage brokers for steering customers into loans with higher interest rates when their credit ratings would qualify them for a cheaper loan.

"Thousands of Latino families rely on mortgage brokers each year to realize their dreams of homeownership. Unfortunately, the trust they place in their mortgage professional is too often violated. Without accountability, making money could trump the needs of Latino families," said Janet Murguía, President and CEO of the National Council of La Raza.

We've urged industry to curb these kickbacks, and we've asked Congress to make sure they do. There is a bill pending now that would crack down on them, sponsored by North Carolina Representatives Brad Miller and Mel Watt and Massachusetts Representative Barney Frank. One of the best things about the bill is that it would not preempt effective state laws already on the books in places like Massachusetts.

Right now Congress does practically nothing to hold accountable the predators or the bank regulators who should be keeping watch on them.

"Predatory lenders are bilking billions of dollars from people who are simply trying to buy a home and get ahead, and the Fed numbers give us a glimpse of exactly who is getting the short end of the stick," said Michael D. Calhoun, president of the Center for Responsible Lending.

Predatory lenders rob people of more than $9 billion a year of the equity in their homes, we at the Center for Responsible Lending estimate, much of that through YSPs. These unscrupulous people push thousands of homeowners into foreclosure, where they lose their homes and hard-earned savings. These predators pock neighborhoods with boarded-up houses and put working-class and minority families on the street, hurting communities and ultimately affecting the entire economy.

Today the Federal Reserve released the mortgage numbers for last year as required every year by the federal Home Mortgage Disclosure Act, or HMDA.

Last year, the Fed began requiring lenders to disclose the cost of their loans to borrowers. The 2004 numbers showed a large disparity, engendering an important nationwide debate about the cause - a question our recent study helped answer.

Today the Fed reports the disparity widened in 2005. The proportion of all home buyers and refinancers receiving higher-cost loans increased across the board, but absolute changes were much greater for African- Americans and Latinos. For example, for loans used to purchase homes, the portion of higher-cost loans shot up for African-Americans and Latinos, increasing 22 and 26 percentage points, respectively. White borrowers also experienced an increase, but a much more modest rise of nine percentage points.

These disparities remain large even after accounting for key borrower characteristics and qualifications. The Federal Reserve report acknowledges that the disparities persist even after adjusting for income levels. Furthermore, our study earlier this year found that African-Americans and Latinos with similar credit scores to white borrowers were still more likely to receive higher-cost loans.

To read the Center for Responsible Lending's report, "Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages," go to

Constructive Actions Lenders Can Take

  • Eliminate the practice of steering borrowers to loans with needlessly higher rates by requiring objective pricing standards;
  • Hold lenders and brokers responsible for providing loans that are suitable for their customers;
  • Create incentives and support policies to combat predatory lending and lead the market to better serve African-American and Latino communities.
  • Ensure that adequate resources are dedicated to fully enforcing fair lending laws; and
  • Support expanded disclosure of key lending data by amending HMDA.

For more information contact: Sharon Reuss, (919) 313-8527, or Michael Flagg, (202) 349-1862, of the Center for Responsible Lending or Janis Bowdler (202) 785-1670, of National Council of La Raza.