African Americans and Latinos in California were more than three times as likely to take out higher-cost home loans as whites in 2005, according to an analysis of data lenders provide to federal banking regulators.
The raw numbers presented in the California Reinvestment Coalition’s report, “Who Really Gets Higher-Cost Home Loans?” are in line with the findings of a Federal Reserve report on the same data, which is collected under the Home Mortgage Disclosure Act. But the group’s conclusion — that lenders target minorities for higher-cost loans — is subject to dispute.
The California Reinvestment Coalition (CRC) is a nonprofit that promotes investment in low-income communities.
Analyzing lending patterns in California and 14 cities, the CRC found that African Americans took out higher-cost home purchase loans 52.6 percent of the time, compared with 16.8 percent of the time for whites. Latinos used higher-cost loans 50.8 percent of the time, compared with 20.1 percent of the time for Asians.
The Federal Reserve report, released in September, found a similar pattern nationwide: 54.7 percent of African-American borrowers took out higher-priced loans, compared with 17.2 percent of whites, and Hispanics took out higher-priced loans 46.1 percent of the time, compared with 16.6 percent of Asians.
A higher-cost loan was defined as a first-lien loan with an annual percentage rate exceeding 3 percent of the rate for Treasury securities of comparable maturity. The threshold for subordinate loans is 5 percent.
The CRC report goes farther than the government’s in its conclusions, asserting that lenders purposely target minority communities for more profitable higher-cost loans, and that more regulation of the mortgage lending industry is needed.
“CRC believes that targeting, steering and discrimination are factors that lead to such large disparities in the cost of credit,” the nonprofit group’s report said.
The report urges lawmakers to “develop strong anti-predatory-lending legislation that is broad enough to ensure lenders only sell loans to consumers that are suitable for them, given their circumstances.” The state of California, CRC maintains, “must more seriously regulate the large number of higher-cost home loans made in the state that are not otherwise subject to regulatory scrutiny.”
The Federal Reserve report, however, cautioned that HMDA data is of limited value in determining whether lenders use racial preferences in deciding what loan products to offer borrowers. Although the HDMA data includes details on 15.6 million loans granted by nearly 8,850 lenders in 2005, information that lenders use when underwriting and pricing loans is not collected.
Without access to loan-to-value ratios, debt-to-income ratios and credit history scores, it’s difficult to say whether minorities take more higher-cost loans because they are not given other choices or because the present a greater risk to lenders, the Fed report said.
The Fed report attempted to account for such factors by adjusting for borrower-related factors such as income and loan amount. After making those adjustments, the 37.5 percent gap between the rate at which blacks and whites took out higher-cost loans nationwide was reduced by nearly 8 percentage points, and the 28.9 percent gap between Hispanics and whites was reduced by nearly 12 percentage points.
Dustin Hobbs, communications director for the California Mortgage Bankers Association, called the report “irresponsible” for making claims “that can’t be backed up.”
“They are more or less countermanding what the Federal Reserve has strongly cautioned people not to do — they said you cannot make conclusions about a company’s lending practices based on the HMDA data,” Hobbs said. “So many factors go into making a loan, you can’t make a conclusion (that a loan is discriminatory) unless you’re sitting next to the loan officer and seeing what they see.”
The CRC report acknowledges the limitations of HMDA data and urges the government to institute more thorough reporting requirements. Although the Federal Reserve has been collecting application and loan-level data on home loans for three decades, Congress did not require lenders to begin providing the income, sex, race and ethnicity of applicants until 1989.
“The industry justifies higher-cost lending by asserting that lenders should be compensated for extending loans to borrowers who are less likely to repay, as evidenced by lower credit scores, less income, higher loan to value ratios, more debt, and other factors,” the nonprofit said in its report. If HMDA data were enhanced by including such key missing variables as credit score and loan-to-value ratios, CRC said, “the public could see to what extent lending disparities reflect permissible factors (income, credit scores, etc.) and to what extent the disparities reflect impermissible and unacceptable factors (discrimination, steering, failure of prime lenders to compete in minority neighborhoods, etc.).”
The report also recommended providing “fully funded” housing counseling services to consumers, better enforcement of fair lending and consumer protection laws, an expansion of Community Reinvestment Act regulations, and requirements that lenders pursue loss mitigation strategies like those required in FHA and VA insured programs.
CRC says higher-cost loans have a “great impact” on the borrower and the borrower’s community. A $248,000 loan at a low-cost 5.87 percent interest rate carries monthly payments of $1,466 a month. The average higher-cost loan rate of 9.68 percent increases that payment by $610 a month — an additional $219,620 in interest payments over the life of the loan.
“Conservatively, people of color in California are paying more than $109 million more per month — or more than $1.3 billion more per year — than they would if they received higher-cost loans at the same rate as white borrowers,” the report concluded.
The number of higher-cost loans issued in California more than doubled in 2005, to 573,492, the report said. About 80 percent were resold on the secondary market to insurance, finance, mortgage, bank and Wall Street securities companies, the report said. Only 1 percent of the California’s higher-cost loans were repurchased by the government-sponsored enterprises Fannie Mae and Freddie Mac.
The report identified New Century Mortgage, ACC Capital/Ameriquest, General Electric/WMC Mortgage, Washington Mutual/Long Beach Mortgage and National City/First Franklin as the top five higher-cost lenders in California in 2005.