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June 14, 2006
Why Do Minorities Receive More Subprime Mortgages? Can You Say, Kickback?
    by Bill Baue

A new Center for Responsible Lending study shoots holes in industry rationale that bad credit histories of African-Americans and Latinos account for disproportionate subprime mortgages.

In September 2005, the Fed released year 2004 Home Mortgage Disclosure Act (HMDA) data revealing significant disparities between what white borrowers and what African-American and Latino borrowers pay for subprime mortgages. The subprime lending industry dismissed charges of racism, suggesting that African-Americans' and Latinos' shakier credit histories and lower down payments (among other potential explanations) justified the higher rates charged. A recent study by the Center for Responsible Lending (CRL), an anti-predatory lending research nonprofit affiliated with community development financial institution (CDFI) Self-Help, controls for these variables and still finds significant disparities, lending credence to charges of racism.

"We looked at a large national sample of loans--about 50,000 subprime mortgages in all--and when we analyzed the numbers, we found what many people had suspected," said Debbie Bocian, CRL senior researcher and study co-author, along with Keith Ernst and Wei Li. "When we compared African-American and Latino borrowers to white borrowers with the same risk characteristics, African-Americans and Latinos were still more likely to get higher-rate loans."

"We found that, for many types of subprime loans, African-American and Latino borrowers were more than 30 percent more likely to receive a higher-rate loan than white borrowers with the same qualifications," she added. "In short, the industry explanation was wrong."

HMDA regulations do not require lenders to report data on credit history and down payments (in part due to industry lobbying), so CRL supplemented HMDA numbers with proprietary data on these variables from the LoanPerformance Subprime Asset-Backed Securities Database. These added data demonstrated that racial disparities persisted, though for different reasons for African-Americans as for Latinos.

"For African-Americans, the most striking disparities that emerged in our research were associated with prepayment penalties; for Latinos, the greatest disparities related to loan type (purchase versus refinance)," stated the CRL study, entitled Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages.

For fixed rate refinanced mortgages with prepayment penalties, African-Americans were 34 percent more likely to receive higher rate subprime loans than whites with similar qualifications. For fixed rate mortgages without prepayment penalties, Latinos were 142 percent more likely to receive higher-rate subprime mortgages than whites with similar qualifications, according to the study.

"So, why do these disparities persist, even after adjusting for differences in risk factors between groups?" Ms. Bocian asked. "Many experts, including us, think that unscrupulous mortgage brokers are receiving kickbacks from lenders for steering borrowers into loans with inflated interest rates."

"These kickbacks, which take the form of fees called 'yield-spread premiums' (or YSPs) likely help explain some of the disparities we observed," she added.

Harvard Law School Professor Howell Jackson has conducted research demonstrating racial disparities due to YSPs--African-Americans pay an average additional up-front charge of $474 per loan, while Latinos pay on average an additional $580 per loan.

"Other causes of pricing disparities may include the inconsistent application of objective pricing criteria, targeting of families of color by higher-rate lenders or brokers, and lack of investment by lower-cost lenders in these communities," the report states. "It is likely that all of these factors contribute to making subprime home loans more costly than necessary."

The study makes a series of recommendations, many of which are included in the Miller-Watt-Frank bill (HR 1182).

"Among other things, it does not allow YSPs to escape scrutiny through loopholes that have plagued federal law for years," said Ms. Bocian. "We support this bill, and so do fair housing, civil rights, and legal aid groups--it would go a long way toward keeping the predators out of home lending."

"When African-American and Latino families are steered into higher-cost loans, this path to security is made steeper," said Hilary Shelton, director of the Washington bureau of the NAACP, the lobbying and public policy branch of the civil rights group. "That means that it's even harder for families of color to build equity for their future; it's even harder to send their children to college; and it's even harder to build wealth for the next generation."

The study also recommends disclosing the data necessary for regulators and watchdogs to assess whether subprime lending exhibits racial or ethnic bias. CRL has filed an amicus (or "friend of the court") brief in supportsupport of a case where New York Attorney General Elliot Spitzer is attempting to require the Office of the Comptroller of the Currency (OCC) to allow him to get banks in his state to disclose this kind of information. Mr. Spitzer's office recognizes how CRL's report underscores the need for the information he is

"We sincerely hope that the Office of the Comptroller of the Currency investigates loan pricing disparities at the banks it regulates with the same vigor with which it sought to stop our inquiries," said Natalie Williams, chief of the attorney general's civil rights bureau. "The center's report, and the troubling racial disparities it reveals, deserves nothing less."


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