African-Americans and Latinos, government figures show, get high-interest sub-prime mortgages far more often than whites. Now researchers at the Center for Responsible Lending find those disparities persist even when the borrowers have the same qualifications as whites.
Lenders say they charge more because African-Americans and Latinos tend to have shakier credit histories, which makes lending to them riskier.
But that explanation is simply wrong, the Center found in its groundbreaking new research.
The most extensive study of its kind shows that even after controlling for differences such as credit scores and the amount of the down payment, African-Americans and Latinos still wind up with a disproportionate share of expensive loans.
Examining 50,000 subprime loans, the Center's researchers found these groups were almost a third more likely to get a high-priced loan than white borrowers with the same credit profile.
The findings show that decades of work by the civil rights movement to bring fairness and opportunity to all homebuyers is still unfinished.
"This report sheds new light on the challenges Latinos face when attempting to buy a home," said Janis Bowdler, housing policy analyst at the National Council of La Raza, the Latino civil rights group. "It is critical to the well-being of the homeownership market that all families have fair and equal access to credit."
The disparities are not only unfair, they have serious economic repercussions: Higher loan costs discourage minority families from buying a home; and higher costs increase the risk of foreclosure for those who do buy homes, threatening working-class neighborhoods and the U.S. economy as a whole.
"When African-American and Latino families are steered into higher-cost loans, this path to security is made steeper," said Hilary Shelton, director of the Washington bureau of the NAACP, the lobbying and public policy branch of the civil rights group. "That means that it's even harder for families of color to build equity for their future; it's even harder to send their children to college; and it's even harder to build wealth for the next generation."
And while the study's results are disturbing for African-Americans and Latinos, all borrowers may be at risk from some of the sub-prime market's common practices.
New York Attorney General Eliot Spitzer is trying to get banks in his state to disclose more about their lending practices, but the banks and even federal regulators are fighting him in court.
"We sincerely hope that the Office of the Comptroller of the Currency investigates loan pricing disparities at the banks it regulates with the same vigor with which it sought to stop our inquiries," said Natalie Williams, chief of the attorney general's civil rights bureau. "The center's report, and the troubling racial disparities it reveals, deserve nothing less."
And on Capitol Hill a House subcommittee is debating whether a bill should include weak provisions favored by industry or stronger protections for borrowers in the vast sub-prime mortgage market, where people with blemished credit borrow and most mortgage abuses occur. The lending industry is lobbying subcommittee members heavily.
In light of our findings, the Center urges the subcommittee to:
- Put controls on the pervasive practice of yield spread premiums, the fees lenders pay to brokers and that rise with the interest rate of the mortgage. Often these fees are nothing more than a polite name for a kickback from a lender to a mortgage broker for steering unsophisticated borrowers into higher-interest-rate loans. These kickbacks, many experts say, are a big reason why the statistics the federal government gathers each year under the Home Mortgage Disclosure Act, or HMDA, show that African-Americans and Latinos wind up in higher-interest-rate loans far out of proportion to their share of the population.
- The federal government should require mortgage brokers to act in the best interests of their customers, which the government does not now do.
- Make brokers and lenders disclose clearly that borrowers are being charged a higher interest rate than they qualify for - and how much the broker is being paid for this.
- Give the government the laws and the money to enforce these rules effectively.
"With release of our research today, we've advanced the debate over racial disparities by showing that the industry's usual explanation is wrong," said Debbie Gruenstein Bocian, the study's author. "The debate now needs to move on to what Congress and the states must do to prevent these disparities."
For a copy of the report, please go to www.responsiblelending.org.