New Report Finds that Minorities Are Targeted for Higher-Rate Mortgage Loans
Feature Story by Stephanie Salter - 6/12/2006
For most Americans, the path to home ownership is a crucial step toward self-determination and security. But for borrowers in the subprime market --which provides higher-interest mortgages for individuals with credit problems or limited credit history -- the path is tainted with racial discrimination.A study released May 31 by the Center for Responsible Lending (CRL) reveals discriminatory lending practices in the subprime market which, until recently, had been written off as byproducts of market forces. The study, which analyses 2004 Home Mortgage Disclosure Act data and the Loan Performance Subprime Asset-Backed Securities database, is the most comprehensive one of its kind on "higher-rate" subprime loans.
CRL found that Latinos and African Americans were over 30 percent more likely to receive higher-rate subprime mortgage loans than identically situated white borrowers. The study controlled for factors such as credit scores, loan-to-value ratios, and other factors that influence loan pricing, in order to assess the effect of race on lending practices.
Lenders have claimed that their rates are mediated by market forces and take into account the risks assumed in lending to low-income, low credit populations. However, CRL senior researcher Debbie Bocian said that the study proves that "The industry explanation was wrong . . . we now know there is not a simple market explanation for the large racial and ethnic disparities in the subprime mortgage market."
The study also showed that African-Americans and Latinos were exploited in very different ways. African-Americans were 6 to 34 percent more likely to be burdened with higher-rate loans and prepayment penalties, while Latino borrowers were 29 to 142 percent more likely to receive higher-rate purchasing loans, depending on interest rates and prepayment penalties.
"The Center for Responsible Lending's latest report on predatory lending is solid evidence of what we in the civil rights community have known all along: racial and ethnic discrimination remains alive and well in the mortgage industry," said Wade Henderson, executive director of the Leadership Conference on Civil Rights (LCCR).
CRL researchers also found that yield-spread premiums (YSPs)--kickbacks from lenders to mortgage brokers for steering borrowers into higher-rate loans--often targeted borrowers of color. Though some borrowers may choose to take a higher rate in order to reduce initial fees, many borrowers are unaware they are charged a YSP and do not receive the benefit of lower fees while paying higher rates.
A House Financial Services Committee subcommittee is currently considering a predatory lending bill that would, among other things, prohibit YSPs from escaping through federal loopholes as they have in the past.
CRL's findings reveal major shortcomings in the enforcement of the Fair Housing Act's non-discrimination provisions, and they reflect the need for serious reconsideration of anti-predatory housing and lending laws. According to Bocian, "Owning a home is the main source of wealth for the vast majority of American families. More expensive loans may dissuade African-American and Latinos from buying homes . . . [and] threaten the financial stability not only of African-American and Latino borrowers, but [also] the health of the entire housing market."
LCCR's Henderson said that the study is just one more example of how Congress has failed to deal with the economic self-sufficiency of the poorest Americans. "Abusive lending practices and the lack of fair economic policies are a truly devastating combination," said Henderson.
