- Black borrowers are 80% more likely to be denied a mortgage than white borrowers.
- The Fair Lending for All Act would create a new federal agency to ensure that there is no discrimination in lending.
- The bill would help end discriminatory practices by making it clear that postcode or census discrimination is prohibited under the ECOA.
- This is a split opinion. The thoughts expressed are those of the author.
In 2020, black borrowers were 80% more likely to be denied a mortgage than white borrowers. While this statistic is staggering, it hardly comes as a surprise to those of us familiar with the US mortgage industry. A holistic look at the American housing market shows that it penalizes people of color in surprising and systemic ways that are not always obvious at the credit level.
The Fair Lending for All Act aims to change this. The bill introduced by Congressman Al Green, a Democrat from Texas, clarifies the language of the Equal Credit Opportunity Act (ECOA) to better counteract systematic discrimination in mortgage credit. At the same time, it is setting up a new office within the Consumer Financial Protection Bureau (CFPB) to verify that lenders are following federal guidelines set out in the Home Mortgage Disclosure Act (HMDA) and ECOA. While seemingly obscure and legal, the Fair Lending for All Act will go a long way toward making mortgage lending more equitable and ending racial gaps in home ownership.
Historically, black homeowners have struggled with systemic racism in the mortgage industry, which has contributed to lower levels and slower home ownership growth among black Americans. Through redlining – a process in which real estate agents and
Guide black tenants and buyers into specific communities and contribute to them de facto Segregation – “Agencies considered black communities too risky for government home loan assistance regardless of the income, wealth or education of residents, or the quality or location of their homes,” Jim Carr, a former senior vice president of the Fannie Mae Foundation, wrote last month.
According to Carr, this has drastically slowed the home ownership rate among black Americans. The home ownership rate among black people has only increased 4% over the past five decades. Meanwhile, the home ownership gap between white and black Americans was 5% smaller in 1920 than it was in 2020.
This problem is then exacerbated by other economic inequalities that black Americans face. A recent study by the McKinsey Global Institute found that black Americans earn, on average, 30% less than white Americans. A disproportionate number of black Americans have student loan debt, accounting for 13.4% of the population, but nearly a quarter of all student loan debt incurred in 2019. Black borrowers are also less likely to inherit and receive financial gifts from family members than white Americans.
The debt-to-income-to-loan ratio was higher among blacks and Latin Americans. Federal Reserve data shows the middle black family owns less than 15% of the middle white family’s wealth. In practice, this means that black and Latin American borrowers have higher levels of debt in relation to their income. In turn, they have to borrow more for their homes and have less down payments to purchase.
Many lenders and underwriters will argue that there is no inherent racism here. If you qualify, you qualify, and if you don’t, you don’t. But in my own experience in the mortgage industry over the past decade, this type of discrimination is not always obvious, even to the people who are being discriminated against.
There are three types of discrimination that the ECOA prohibits: overt discrimination, comparative discrimination, and differential discrimination. Overt discrimination occurs when a lender blatantly treats an applicant differently based on a protected characteristic such as race or gender. Comparative discrimination results from “differences in treatment that are not fully explained by legitimate non-discriminatory factors,” according to the Federal Reserve. The final type of discrimination, differential impact, “occurs when a lender applies a racially (or otherwise) neutral policy or practice to all loan applicants alike, but the policy or practice disproportionately excludes or charges on certain individuals on a prohibited basis”.
If someone says, “we don’t lend black money” or “unmarried women are charged a commission”, that is open discrimination. Other types of discrimination are not always that obvious. Some financial institutions may have policies that take into account the borrower’s census district or zip code, which can be discriminatory due to racial practices such as redlining. This is one of the practices that the Fair Lending for All Act seeks to curb by making it clear that it is illegal to discriminate based on counting district or zip code.
This clarification is welcome as it will help loan officers and underwriters better understand the law. It will also require lenders to evaluate and even amend policies that are currently discriminating against in the mortgage industry, whether inadvertent or not. In this way, lending becomes more equitable for those who have historically been excluded from equal access to credit.
Give black homeowners a chance
Much of the discrimination that is currently keeping Americans from having equal access to credit comes from seemingly racially neutral policies that are applied equally but have different effects. Loan officers pay commissions based on the loan amount, and getting a smaller loan on a less expensive home may not be as enticing as lending on a larger loan in a more expensive area. I have certainly heard several times in my mortgage career that it was not worth the work, but never in relation to an applicant’s race.
However, given the income and wealth disparities discussed earlier, the possibility of comparative discrimination is obvious, but only to someone looking at the entirety of the output of a loan officer or a business. Hence, “on the ground” lenders may not see that what they are doing is discrimination, and borrowers who are discriminated against in secret or comparatively – and certainly those that have different effects – may not see it either.
That doesn’t mean the results aren’t just as fatal. Indeed, these practices make it difficult to fill the racial wealth gap. Last month I was horrified but not surprised by the story of a black woman in Indiana who discovered her home value doubled when she owned a white boyfriend. Earlier this year, a study of house prices in Chicago’s black and Latin American neighborhoods showed that the value of these homes was $ 324,000 between comparable properties in white neighborhoods. While this may seem astronomical, the same sociologists who looked at the Chicago study last year found this to be a national problem, with the gap nationwide at $ 245,000. This in turn costs minority sellers hundreds of thousands of equity, which has a significant impact on the racial wealth gap.
Minority buyers are also disadvantaged. The pandemic has exacerbated gentrification, with home prices skyrocketing even in once affordable communities. A higher debt-to-income ratio (and thus a limit on borrowing) puts them at a disadvantage in bidding wars. On the other hand, borrowers with intergenerational wealth and less debt could either spend more money on down payments, thereby lowering the LTV, or borrow more due to a lower DTI. But here too, minority borrowers are disadvantaged compared to their white counterparts. A study by the Brookings Institute last year found that “the net worth of a typical white family is nearly ten times greater than that of a black family …” In a booming seller market, this wealth inequality can prevent minority borrowers from being able to do so to compete for housing.
These realities make ensuring fair and unbiased lending a top priority for the federal government and lenders. You need an agency that looks at the problem from a bird’s eye view – and can thus form a more comprehensive picture of the situation. It is for these reasons that I am so encouraged by the Fair Lending for All Act. This draft law establishes an Office of Fair Lending Testing within the CFPB. The Office of Fair Lending Testing, which is responsible for making sure these differences disappear, would essentially use “Secret Shoppers” to assess whether lenders are complying with ECOA and all other applicable anti-discrimination laws.
This allows the CFPB to better assess the intentions of each loan officer and appraiser, weed out those who openly discriminate, and target the companies who allow it. It can also correct behaviors that lead to comparative discrimination or differential effects, and help companies develop best practices that ensure a fair lending process for all Americans.
Ending the racial income and wealth gap is a cross-generational project that we must begin today. The Fair Lending for All Act can help Black and Latin American Americans better secure a piece of the American dream that whites have largely had access to. Congress cannot miss this opportunity to fix a broken rung on our nation’s ladder.