(This is Part 2 of a two-part series. Read Part 1.)

Last week, I made the point that more than 90 percent of home mortgage transactions involved a two-stage process. The first stage, the development of posted prices that are delivered to loan officers and mortgage brokers, is bias-free. The unequal treatment of minorities occurs in stage 2, where posted prices are converted into the final prices paid by borrowers. A sizeable number of loan officers and brokers charge what the market will bear, and minorities end up paying more because they are more vulnerable.

Lenders may commit many sins, but I don’t believe that discrimination against minorities is one of them. Wholesale lenders have virtually no control over the markups charged by brokers. While loan officers working for retail lenders are employees, lenders cannot eliminate their pricing discretion or control how it is used. They would love to, but any lender that tried it would lose its loan officers and the loans they bring in.

Community groups don’t like my analysis because it takes lenders off the hook. Brokers and loan officers are a much less attractive target for them than lenders. A recent study by the Center for Responsible Lending (CRL) concedes that posted prices are free of bias, but claims that lenders influence the final prices in indirect ways that can be discriminatory. In my opinion, none of their arguments withstand close scrutiny. The longer version of this article on my Web site will have a detailed analysis of their arguments.

Community groups also don’t like the idea that loan officers and brokers are out to skin everyone but are more successful with minorities. This conclusion can be interpreted to mean that the victims are partially responsible for their own mistreatment. In my view, this interpretation is sometimes unavoidable. Borrowers are victimized primarily because they are ill informed, and given that the information that would protect them is widely available, they bear some responsibility for not finding and using it.

In the community group vision of the mortgage market, lenders are the villains and minorities the victims. Their proposed remedies largely involve government increasing the burdens and responsibilities imposed on lenders. For example, community groups favor making lenders legally responsible for the suitability of the mortgages they provide in meeting the needs of borrowers. I am opposed to such a rule, for reasons discussed in another column.

I wish the community groups did a better job of advising their constituents about how to avoid trouble. Their advice is mainly directed at how to identify the bad guys, which is the wrong approach. There are too many bad guys, and they are too good at disguising their true nature.

The right approach is to identify the good guys and ignore the rest, the same approach used by savvy pickers of wild mushrooms. They only pick the ones they know are good. Picking the mushrooms that aren’t bad requires an ability to identify all the bad ones, which is more time-consuming and much riskier.

Minorities (and others) can avoid discrimination by selecting distribution channels where pricing discretion is either absent or controllable by the borrower. Pricing discretion is absent in Internet-based lending because loan officers don’t capture the customer and therefore don’t have the clout to dictate their terms of employment.

Internet-based lending offers other borrower protections as well. These include more complete information on lender fees and third-party fees, and the ability of shoppers to monitor their price from day to day until they lock it. On my Web site, I list and rank the best of the Internet-based lenders, including two that qualify as Upfront Mortgage Lenders.

Another way to avoid discrimination is to negotiate an all-in fee with a mortgage broker, the fee to include any payments received by the broker from the lender. While most brokers don’t work that way, preferring to keep their markup their own business, most of them will if the borrower insists on it. (Upfront Mortgage Brokers, who are listed on my site, work this way as a matter of course). The borrower has the clout to dictate the terms of his engagement with the broker, if only he realizes it.

If the CRL and other community groups guided borrowers to lending channels where they would not be exploited, these channels could become the dominant delivery systems, and the channels where predators operate would shrink. This would require nothing of government, whose track record in protecting mortgage borrowers is very poor.

The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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