Racial gulf persists in who gets home loans

December 14, 2013

By Ashley Apodaca and Ajong Mbapndah L

Imagine a Virginia couple with an annual household income of about $85,000. Suppose they’re house-hunting and seeking a mortgage loan of $200,000. What are the odds that the loan application will be denied?

If the couple is white, there’s a 6 percent chance that the loan application will be rejected, according to our computer analysis of the latest federal data.

But if the couple is African American, it’s a different story: They have an 18 percent chance of being denied a loan, the analysis found.

Similar incomes, similar loan applications, but different denial rates for different races: That is what emerges from our review of every home purchase loan application processed in Virginia and Maryland in 2011 and 2012.

The analysis included about 300,000 records filed with government regulators by banks and other lenders and made available to the public under the federal Home Mortgage Disclosure Act.

Overall, African Americans and Hispanics were about twice as likely as Caucasians to be denied a home mortgage loan, the analysis found. For some income categories, the disparities were even greater. In 2012, for example:

¶ Among Virginia loan applicants with incomes between $100,000 and $125,000, the denial rates were more than 15 percent for African Americans, 11 percent for Latinos and 7 percent for whites.

¶ For applicants in that same income bracket in the Richmond metro area, the denial rates were more than 14 percent for blacks, 15 percent for Latinos and less than 5 percent for whites.

¶ For Virginians making $75,000 to $100,000 a year, the denial rates were 19 percent for African Americans, 13 percent for Hispanics and 9 percent for Caucasians.

¶ In Maryland, among loan applicants with incomes between $50,000 and $75,000, the denial rates were 23 percent for African Americans, 17 percent for Latinos and 10 percent for whites.

¶ Among Maryland loan applicants making $100,000 to $125,000, the denial rates were 19 percent for blacks, 12 percent for Latinos and 7 percent for Caucasians.

Tracy McCracken, compliance manager at the National Community Reinvestment Coalition, believes that racism contributes to the discrepancies. “Discrimination is illegal, unjust and detrimental to the economic growth of underserved communities in the United States,” the NCRC says on its website.

The coalition works to “increase fair and equal access to credit, capital, and banking services/products for low- and moderate-income communities.” The NCRC regularly “takes its complaints to court” or to the U.S. Department of Housing and Urban Development, McCracken said.

She said, for instance, that the coalition has persuaded banks to use the Federal Housing Administration’s credit-score guidelines, instead of more stringent rules, in determining whether applicants can qualify for a loan.

“We have gotten lenders to agree to use the credit score that FHA requires for its loans when lenders wanted to use higher scores,” McCracken said.

The disparities in loan denial rates among racial and ethnic groups are not exactly a surprise.

In 1989, The Atlanta Journal-Constitution won a Pulitzer Prize for “The Color of Money,” its investigation into discriminatory lending practices the previous year.

“Race — not home value or household income — consistently (determined) the lending patterns of metro Atlanta’s largest financial institutions,” reporter Bill Dedman wrote. At the time, he found that the loan denial rate for blacks was often four times the denial rate for whites.

Twenty-five years later, our review of Virginia’s and Maryland’s home loan data shows that inequality persists, even among applicants of the same income level. However, the gap has closed considerably.

Congress passed HMDA in 1975. It requires banks and lending institutions to report to the government certain information about every mortgage loan application they receive. The information includes the type and amount of the loan, the location of the property and outcome (whether the application was approved or rejected).

According to “A Guide to Home Mortgage Disclosure Act Data,” the statistics were intended to help identify “potentially discriminatory lending patterns” and to ensure that local banks are “meeting their communities’ housing credit needs.”

HMDA has been revised over the years. Today, lenders also must report information about the applicants, such as their race, gender and income.

This information can be used to analyze lending patterns by the applicants’ demographics, by the properties’ location, by the financial institution and by other variables. For instance, last year:

¶ In the Richmond metro area, among all home loan applicants of all income levels, the denial rates were 23 percent for African Americans, 19 percent for Latinos and 9 percent for whites.

¶ In the Baltimore metro area, among all home loan applicants of all income levels, the denial rates were 21 percent for African Americans, 16 percent for Latinos and 8 percent for whites.

The pattern remains consistent even when comparing applicants in the same income bracket: Blacks usually are denied loans twice as often as whites.

Although this may seem like racial discrimination, there’s more to the situation than meets the eye.

As the HMDA guide states, “users should be cautious in drawing conclusions on the basis of HMDA data alone.” For one thing, many records are missing key pieces of information.

The HMDA reporting form includes space for lenders to state why a loan application was denied. The reasons can range from incomplete applications, to work history, to insufficient cash.

However, in about one third of the rejected loans, the “reason denied” space was left blank. When it was filled in, the two most common reasons for rejecting a loan, regardless of the applicants’ race, were credit history and debt-to-income ratio.

“The statistics may be interesting, but the cataclysmic changes in the housing market in the last few years make it difficult to draw definite conclusions,” said Bob Nolan, a professor of economics at the University of Richmond.

He thinks banks may be cautious after the real estate bubble burst in 2007, triggering the recession and a wave of foreclosures. “The housing market is still in recovery from a meltdown which was caused in part by people making no down payments and inadequate income verification,” Nolan noted.

He said factors like “wealth, credit and job history are decisive and must be put in context for a proper appraisal of the numbers.”

Jenny Fowler, a Realtor at the Casa Latino real estate agency in Silver Spring, Md., believes financial factors account for the differences in loan denial rates. For example, she said, “bad credit and job insecurity” disproportionately affect Latinos, making it harder for them to obtain home loans.

“Access to mortgage loans is a daunting task for Hispanics,” Fowler said.

Since 1970, HUD says it has “has rigorously monitored trends in racial and ethnic discrimination in both rental and sales markets approximately once each decade through a series of nationwide paired-testing studies.” In its most recent study of 28 metropolitan centers, the department stated:

“When well-qualified minority home seekers contact housing providers to inquire about recently advertised housing units, they generally are just as likely as equally qualified white home seekers to get an appointment and learn about at least one available housing unit. However, when differences in treatment occur, white home seekers are more likely to be favored than minorities. Most important, minority home seekers are told about and shown fewer homes and apartments than whites.”

HUD’s Office of Fair Housing and Equal Opportunity helps “administer and enforce federal laws and establishes policies that make sure all Americans have equal access to the housing of their choice.”

Complementing the efforts of government agencies is a plethora of advocacy groups for the rights of minorities. They include the National Fair Housing Alliance, “a consortium of more than 220 private, non-profit fair housing organizations, state and local civil rights agencies, and individuals throughout the United States.”

Using a mix of education, advocacy and enforcement programs, the NFHA “protects and promotes equal access to apartments, houses, mortgage loans and insurance policies for all residents of the nation.”

Mortgage loans are just one target of groups battling racial inequalities in housing. The NFHA recently filed a discrimination claim against Bank of America for maintaining foreclosed homes in white neighborhoods in a better state than in black neighborhoods. The alliance cited Baltimore as an example.

In Baltimore’s communities of color, more than three-fourths of Bank of America’s foreclosed properties had no “for sale” signs, the NFHA said.

The group’s report also stated that “90 percent of Bank of America-owned homes in Baltimore communities of color had more than five maintenance or marketing problems, and 48 percent had more than 10 marketing and maintenance deficiencies.” Predominantly white communities did not exhibit similar patterns of neglect.

Reasons blacks are denied loans

More on this story

How we computed loan denial rates

The law vs. banks on home loans

About the Home Mortgage Disclosure Act data