The U.S. Department of Justice is using loan-level data collected from lenders to investigate whether minorities are targeted for higher-priced loans, but consumer and civil rights groups say not enough is being done to combat unfair lending practices.
Since last fall, the Federal Reserve Board and FDIC have referred five suspected cases of unfair lending practices to the DOJ, said Grace Chung Becker, deputy assistant attorney general in the Attorney General’s Civil Rights Division. The DOJ has opened “several investigations” based on those referrals and its own analysis of loan data collected under the Home Mortgage Disclosure Act, Becker said.
Testifying before members of the House Financial Services Committee this week, Becker said HMDA pricing data has provided the DOJ with “a welcome, additional source of information for identifying potential investigations.” But the data is only a starting point for determining whether lenders target minorities.
HMDA data has shown minorities are more likely to take out higher-priced mortgage loans, and can be used to pinpoint whether some lenders make a greater proportion of higher-priced loans to minorities than others. But the price of loans can also depend on a borrower’s credit score, loan-to-value ratios and debt-to-income ratios — information not currently collected under HMDA, Becker said.
“In order to determine whether minority borrowers are being charged more than similarly situatedwhite borrowers, we need to analyze data about other factors that lenders can legitimately consider in setting interest rates,” Becker told the committee in her prepared remarks.
Other factors that influence the cost of a loan are its term, whether the rate is fixed or variable, and whether the loan is jumbo or conforming. Becker said DOJ must conduct statistical and econometric analyses of additional data obtained from lenders suspected of unfair lending practices to assess whether those factors explain the pricing differences identified in HMDA data.
“These fair-lending investigations require a substantial investment of time and resources,” Becker said. “While I cannot discuss details of ongoing investigations, I am pleased to report that all of the lenders currently under investigation are cooperating with the Division.”
Becker said two such investigations have already been completed and closed, and others are ongoing. DOJ expects to initiate more investigations in coming months, she said, either from its own analysis of HMDA data or as a result of referrals from banks or regulatory agencies.
For three decades, mortgage lenders who are regulated at the federal level — such as federally chartered banks and savings and loans — have been required under the Home Mortgage Disclosure Act to provide regulators with information about each loan they make.
But it wasn’t until 1989 that Congress required lenders to begin providing application and loan-level information on the income, sex, race and ethnicity of applicants. Then, beginning in 2004, lenders were also required to disclose pricing information on loans above designated thresholds.
First-lien loans are considered “higher-priced” under HMDA if the APR exceeds 3 percent of the rate for Treasury securities of comparable maturity. The threshold for second or junior loans is 5 percent.
Once data on price, race and ethnicity were all being collected, it became apparent that minorities were more likely to take out higher-priced loans.
A Federal Reserve study of HMDA data collected in 2005 showed 54.7 percent of African-American borrowers took out “higher-priced loans,” compared with 17.2 percent of whites. Hispanics took out higher-priced loans 46.1 percent of the time, compared with 16.6 percent of Asians.
Such findings have prompted consumer and civil rights groups to call for more stringent enforcement of the Fair Housing and Truth in Lending acts. But mortgage lenders — and the Federal Reserve, in its own analysis of HMDA data — have said without studying other factors that affect pricing, it’s not possible to say whether lenders are targeting minorities for higher priced loans.
Ginny Hamilton, executive director of the Fair Housing Center of Greater Boston, told the committee other studies have documented that lenders do, indeed, target minorities.
“Findings from HMDA data, however strong and however suggestive, are regularly dismissed as not conclusive proof of racial (or) ethnic discrimination,” Hamilton said in her prepared remarks. “More complex statistical evidence, however carefully found, is often based on statistical techniques too complicated to be readily understood by the average person, and the industry has never failed to find experts who will, for a fee, dispute the validity of any conclusion that it didn’t like.”
Hamilton urged Congress to step up the collection of HMDA data to include loans originated by mortgage brokers, and to collect information on loan-to-value ratio, credit score and total fees. Separate high-cost benchmarks are also needed for fixed-rate and adjustable-rate mortgages, she said.
To document unfair lending practices, Hamilton advocated the stepped-up use of “paired testing,” in which applicants of different races but the same borrowing criteria apply for loans from the same lender to reveal whether they are treated differently. Hamilton urged federal government agencies and bank regulators to “make much more aggressive and extensive use of paired testing” by contracting and working directly with qualified fair-housing enforcement organizations like hers.
She urged Congress to pass the Housing Fairness Act of 2007, HR 2926, which would double funding for HUD’s Fair Housing Initiatives Program to $52 million and provide at least $20 million annually for fair-lending and fair-housing enforcement testing and actions. The bill, introduced by Rep. Al Green, D-Texas, has 44 cosponsors and was referred to the House Financial Services Committee on June 28.