Mortgage discrimination

Mortgage discrimination or mortgage lending discrimination is the practice of banks, governments or other lending institutions denying loans to one or more groups of people primarily on the basis of race, ethnic origin, sex or religion. One of the most notable instances of widespread mortgage discrimination occurred in United States inner city neighborhoods from the 1930s up until the late 1970s. There is evidence that the practice still continues in the United States today.^[1]

Background

African Americans and other minorities found it nearly impossible to secure mortgages for property located in redlined zones.^[2] The systematic denial of loans was a major contributor to the urban decay that plagued many American cities during this time period. Minorities who tried to buy homes continued to face direct discrimination from lending institutions into the late 1990s. The disparities are not simply due to differences in creditworthiness.^[3] With other factors held constant, rejection rates for Black and Hispanic applicants was about 1.6 times that for Whites in 1995.^[4] Fairness in lending was improved by the Home Mortgage Disclosure Act, passed in 1975. It requires banks to disclose their lending practices in the communities they serve. In the 1970s, the private sector fight against mortgage discrimination began to be led by community development banks, such as ShoreBank in Chicago.^[5]

Contemporary mortgage discrimination

Several class action mortgage discrimination claims have been filed against lenders across the country, alleging that lenders disproportionately targeted minorities for high cost, high risk subprime lending, which has resulted in disproportionately higher rates of default and foreclosure for minority African American and Hispanic borrowers.^[6]

FHA loans, a Federal Mortgage program, went to the white majority and reached few minorities. In a study done in Syracuse, between 1996 and 2000, of the 2,169 FHA loans issued only 29 or 1.3 percent went to predominantly minority neighborhoods compared with 1,694 or 78.1 percent that went to white neighborhoods.^[7][8] Mortgage discrimination played a significant part in the real estate bubble that popped during the later part of 2008, it was found that minorities were disproportionately steered by lenders into subprime loans.^[9]

In 1993 President Bill Clinton made changes to the Community Reinvestment Act to make mortgages more obtainable for lower and lower-middle class families. The changes ushered in during the Clinton Presidency encouraged banks to make mortgage loans to people who otherwise would not have qualified for them. In 1998 the Federal Bank of Boston issued a report entitled “Closing the Gap: A Guide to Equal Opportunity Lending." The 30 page document was intended to serve as a guide to loan officers to help curb discriminatory lending ^[10] "Closing the Gap," instructs banks to hire based upon diversity needs, sweeten the compensation structure for working with lower income applicants, encourages shifting high risk, low income applications to the sub prime market, by saying "the secondary market [Subprime Market] is willing to consider ratios above the standard 28/36," and "Lack of credit history should not be seen as a negative factor."

While, "Closing the Gap" was not an industry-wide mandate, it illustrates the efforts banks took to meet public pressure to overcome perceived mortgage discrimination. Under the Clinton administration community organizers pressured banks to increase their loans to minorities even though many minority applicants could not qualify for traditional 30-year fix mortgages. Karen Wegmann, the head of Wells Fargo's community development group in 1993 told the New York Times, "The atmosphere now is one of saying yes." ^[11] The same New York Times article echoed "Closing the Gap," writing, "The banks have also modified some standards for credit approval. Many low-income people do not have credit-bureau files because they do not have credit cards. So lenders are accepting records of continuously paid utility bills as evidence of creditworthiness. Similarly, they will accept steady income from several employers instead of the length of time at one job."

Because of looser loan restrictions many people who could not find themselves qualifying for a mortgage before now could own a home. Under pressure from activist organizations such as ACORN, then President Bill Clinton, and influential Democrats in Congress like Barny Frank,^[12], banks began loans to people who should not have qualified for loans. Because banks were pressured to loan to minorities and low income applicants, and because the applicants were low-income who had rented homes for generations the banks could reap profits by selling products loaded with fees because the applicants did not either know, or care to read the fine print that would eventually raise their mortgage payments ^[13]

Minorities willingly entered sub-prime mortgages in far great numbers than whites and represented a disproportional percentage of foreclosures,^{[14] [15]} The resulting wave of minority foreclosures tipped a fading housing market into a dive and contributed to the economic fall of 2008/2009.

Recently, the NAACP has submitted a lawsuit concerning alleged injustices in the lending industry.^[16] An analysis, by N.Y.U.’s Furman Center for Real Estate and Urban Policy, illustrated stark racial differences between the New York City neighborhoods where subprime mortgages were common and those where they were rare. The 10 neighborhoods with the highest rates of mortgages from subprime lenders had black and Hispanic majorities, and the 10 areas with the lowest rates were mainly non-Hispanic white. The analysis showed that even when median income levels were comparable, home buyers in minority neighborhoods were more likely to get a loan from a subprime lender.^[1] Discrimination motivated by prejudice is contingent on the racial composition of neighborhoods where the loan is sought and the race of the applicant. Lending institutions have been shown to treat black and Latino mortgage applicants differently when buying homes in white neighborhoods than when buying homes in black neighborhoods.^[17] An example of this occurred in the 60's and 70's on the near northside of Chicago. Thousands of blacks, Latinos, and poor people were systematically dislocated and prevented from acquiring loans by realtors and lending institutions with the blessings of the city's urban renewal program.^{[citation needed]}

Reverse redlining

Reverse redlining occurs when a lender or insurer particularly targets minority consumers, not to deny them loans or insurance, but rather to charge them more than would be charged to a similarly situated majority consumer, specifically marketing the most expensive and onerous loan products. These communities had largely been ignored by most lenders just a couple decades earlier. However these same financial institutions in the 2000s saw black communities as fertile ground for subprime mortgages. Wells Fargo for instance partnered with churches in black communities, where the pastor would deliver "wealth buildling" seminars in their sermons, and the bank would make a donation to the church in return for every new mortgage application. There was pressure on both sides, as working-class blacks wanted a part of the nation’s home-owning trend.^[18][19]

A survey of two districts of similar incomes, one being largely white and the other largely black, found that branches in the black community offered largely subprime loans and almost no prime loans. Studies found out that high-income blacks were almost twice as likely to end up with subprime home-purchase mortgages as low-income whites. Loan officers were also apparently aware that what they were doing was exploitative, as they referred to blacks as “mud people” and to subprime lending as “ghetto loans.”^{[18][19] [20][21]} A lower savings rate and a distrust of banks stemming from a legacy of redlining may help explain why there are fewer branches in minority neighborhoods. In recent years while subprime loans were not sought out by borrowers, brokers and telemarketers actively pushed them. A majority of the loans were refinance transactions allowing homeowners to take cash out of their appreciating property or pay off credit card and other debt.^[22]

Several state attorney generals have begun investigating these practices which may violate fair lending laws, and the N.A.A.C.P. have filed a class-action lawsuit charging systematic racial discrimination by more than a dozen banks.

Redlining Property Type. Other forms of redlining include the nullification of mortgage loans based on internal bank policies and procedures that fail to recognize complex property types. Co-Op and Condo Conversions in New York City are one such example. These building types are often made up of legacy rent controlled and rent stabilized units or may contain another protected class of tennant. Lenders who practice redlining will often cite sponsor concentration or high rental concentration as an excuse to "redline" the property type. Such internal policies which run counter to known state and municipal laws and statutes are an illegal form of silent judgment on the economic and racial makeup of a building seeking to convert and improve a neighborhood or community.

Laws

Equal Credit Opportunity Act

Under the Equal Credit Opportunity Act (“ECOA”), a creditor may not discriminate against an applicant based on the applicant’s race, color, or national origin “with respect to any aspect of a credit transaction,” 15 U.S.C. § 1691.

Fair Housing Act

Under the Fair Housing Act (“FHA”) (Title VIII of the Civil Rights Act of 1968), it is “unlawful for any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin.” 42 U.S.C. § 3605. Section 3605, although not specifically naming foreclosures, discrimination in “the manner in which a lending institution forecloses a dlinquent or defaulted mortgage note” falls under the realm of the “terms or conditions of such loan.” Harper v. Union Savings Association, 429 F.Supp. 1254, 1258-59 (N.D. Ohio 1977).

FDIC

Consistent with many jurisdictions throughout the country, the Federal Deposit Insurance Corporation (“FDIC”), based in part on a study conducted by the Federal Reserve Bank of Boston, issued a “Policy Statement On Discrimination In Lending” on April 29, 2004, emphasizing the breadth of prohibitions on discriminatory conduct in lending under the ECOA and the FHA. The FDIC Policy Statement explained that “courts have recognized three methods of proof of lending discrimination under the ECOA and the FH Act,” including: “Overt evidence of discrimination,” when a lender blatantly discriminates on a prohibited basis; evidence of “disparate treatment,” when a lender treats applicants differently based on one of the prohibited factors; and evidence of "disparate impact," when a lender applies a practice uniformly to all applicants but the practice has a discriminatory effect on a prohibited basis and is not justified by business necessity.

FDIC Policy Statement, p. 5399 (April 29, 2004).

Civil Rights Act of 1966

In addition to ECOA and FHA, the Civil Rights Act of 1966, as amended, provides that “[a]ll citizens of the United States shall have the same right, in every State and Territory, as is enjoyed by white citizens thereof to inherit, purchase, lease, sell, hold, and convey real and personal property.” 42 U.S.C. § 1982.

See also

• Computer-assisted reporting
• Redlining
• Racial steering
• Segregation
• White flight
• Black flight
• Home Mortgage Disclosure Act

Sources

1. ^ ^{a b} Study Finds Disparities in Mortgages by Race The New York Times By MANNY FERNANDEZ Published: October 15, 2007
2. ^ "Loans To White Renegades Who Back Negroes Cut Off," Harlem Home News, April 7, 1911
3. ^ What We Know About Mortgage Lending Discrimination in America (September 1999)
4. ^ Discrimination in mortgage lending Chicago Fed Letter, Jul 1995 by Hunter, William C
5. ^ SR.com: 'Bank with a heart' thrives
6. ^ Michael Aleo, Pablo Svirsky, Foreclosure Fallout: The Banking Industry's Attack on Disparate Impact Race Discrimination Claims Under the Fair Housing Act and Equal Credit Opportunity Act, Boston University Public Interest Law Journal 1 (Fall 2008).
7. ^ http://www.encyclopedia.com/doc/1G1-86148585.html
8. ^ http://syracusethenandnow.org/Redlining/NewRedlining/FHA_Goes_To_WellToDo.htm
9. ^ http://www.huffingtonpost.com/2009/10/01/minorities-more-likely-to_n_306870.html
10. ^ Closing the Gap, Closing the Gap: A Guide to Equal Opportunity Lending
11. ^ Shamed by Publicity, Banks Stress Minority Mortgages, [1] Shamed by Publicity, Banks Stress Minority Mortgages, accessed Dec. 22, 2009
12. ^ Frank Not Free From Blame In Mortgage Mess, [2] Frank Not Free from Blame in Mortgage Mess, accessed Dec. 22, 2009
13. ^ Inside the Countrywide Lending Spree, [3] Inside the Countrywide Lending Spree, accessed Dec. 22, 2009
14. ^ Minority families face wave of foreclosures Consumer groups urge more 'teeth' in laws combating predators, [4], accessed Dec. 22, 2009
15. ^ Consumer groups urge more 'teeth' in laws combating predators, accessed Dec. 22, 2009
16. ^ NAACP Fights Loan Discrimination
17. ^ Stephen R Holloway (1998) Exploring the Neighborhood Contingency of Race Discrimination in Mortgage Lending in Columbus, Ohio Annals of the Association of American Geographers 88 (2), 252–276.
18. ^ ^{a b} Ehrenreich, Barbara; Muhammad, Dedrick (September 13, 2009). "The Recession's Racial Divide". The New York Times. http://www.nytimes.com/2009/09/13/opinion/13ehrenreich.html?pagewanted=print. 
19. ^ ^{a b} Powell, Michael (June 7, 2009). "Bank Accused of Pushing Mortgage Deals on Blacks". The New York Times. http://www.nytimes.com/2009/06/07/us/07baltimore.html?_r=1&pagewanted=print. 
20. ^ Minority families face wave of foreclosures Consumer groups urge more 'teeth' in laws combating predators, [5], accessed Dec. 22, 2009
21. ^ Consumer groups urge more 'teeth' in laws combating predators, accessed Dec. 22, 2009
22. ^ Bajaj, Vikas; Fessenden, Ford (November 4, 2007). "What's Behind the Race Gap?". The New York Times. http://www.nytimes.com/2007/11/04/weekinreview/04bajaj.html.