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