African-American and Latino borrowers with the same credit scores as white borrowers are 30 percent more likely to get higher-cost subprime loans, which charge even higher interest rates than most subprime loans, a new study claims.
The study, released Wednesday by the Center for Responsible Lending (CRL), a nonpartisan research and policy organization, examined 50,000 subprime loans made all over the country, combining this data with information from an earlier study.
“African-American and Latino families are paying a premium for home loans because of the color of their skin,” said Hilary Shelton, director of the Washington bureau of the National Association for the Advancement of Colored People, in a teleconference on the CRL report Wednesday.
The study concluded that African-American borrowers were 31 percent more likely to receive a higher interest rate on a subprime fixed home mortgage, while they were 15 percent to 16 percent more likely to pay more interest on an adjustable-rate mortgage on a home purchase.
Latinos were 45 percent more likely to get a higher-interest fixed-rate loan if they were seeking a subprime loan and between 29 percent and 37 percent more likely to pay more for an adjustable-rate mortgage on a home purchase, according to the study.
Though there is some disagreement as to the meaning of the term, generally, subprime lenders are those who write mortgages for customers who can’t qualify for traditional “prime” loans, often because they have poor credit histories.
Such loans charge higher interest, the rationale being that the lenders are taking a bigger risk. In the case of this study, multicultural borrowers were likely to get the highest-cost subprime loans.
An earlier report by the Federal Reserve Board on 2004 home-lending data, published in 2005, indicated that even after adjusting for factors such as income level that could raise mortgage interest rates, African Americans are still nearly twice as likely as whites to be given high-cost loans.
The CRL’s study supplemented the data from the Federal Reserve Board’s study with information from the Loan Performance Subprime Asset-Backed Securities Database. The database was supplied by San Francisco-based company Loan Performance.
By using information from both databases, the CRL was able to create an apples-to-apples comparison of borrowers. Two different borrowers, each with the same or similar credit score, loan-to-value ratio, down payment, income documentation and other risk factors, could be compared, with race being the only variable.
“When we compared Latino buyers to whites with the same characteristics, we found that they were 30 percent more likely to receive the higher-cost subprime loans,” said Debbie Gruenstein Bocian, senior researcher with the Center for Responsible lending, in a teleconference on the center’s report.
Asked how multicultural consumers can protect themselves from overly expensive loans, Keith Ernst, senior policy counsel for the CRL, said, “Get opinions from people you can trust. Ask the bank down the street. You should find your mortgage, not have your mortgage find you.”
“We encourage borrowers to know they have the right to negotiate, to shop around, to look at different sources of credit such as credit unions,” said Natalie Williams, chief of New York Attorney General Eliot Spitzer’s civil rights bureau.
“We encourage them to get a sense of what they might qualify for by using Internet resources such as Loans Direct,” the civil rights bureau chief said.
“The National Council of La Raza (NCLR) funds a network of counseling services for Latinos and Housing and Urban Development supports housing counselors in many communities,” said Janis Bowdler, housing policy analyst for the NCLR. “Immediately after they sign their contract, they can have someone look at it and make sure it’s OK.”
However, Bowdler said, “What we really need to complement these things is to provide adequate protection for consumers even when they have done their homework.”
With that in mind, lenders should be required to share more information about their loans, the panelists said. Attorney General Spitzer’s office is trying to get banks in New York to disclose more about their lending practices, panelists noted.
Also, a House Financial Services committee is working on a bill, the Miller-Watt-Frank bill, aimed at curtailing predatory lending, Bocian said. “We hope our study will show that this bill should become law,” she said.