New report shows mortgage lending disparities in communities of color

July 20, 2012 at 1:43 pm 2 comments

Reinvestment Partners, along with a group of advocacy organizations from other states, released the sixth  report in their “Paying More for the American Dream” series, looking at mortgage lending patterns in seven cities across the country, including Charlotte. The report, “Racial Disparities in FHA/VA Lending,” found that people of color and borrowers in communities of color were disproportionately getting government-backed loans insured by the Federal Housing Administration or the Department of Veterans Affairs. This disparity raises questions about whether these borrowers are able to access loans from conventional lenders, such as banks.

Although FHA lending is a vital source of credit for borrowers of color, the disproportionate prevalence of FHA loans in communities of color raises fair lending flags. First, it reflects an absence of conventional mortgage lending in communities of color and potential redlining. Second, advocates have concerns that lenders continue to steer loan applicants of color who qualify for conventional loans into FHA loans, particularly given the history of racial steering and other discriminatory practices by FHA lenders and brokers. Such steering not only violates fair housing laws but also harms entire communities.

The chart below clearly shows the disparity between predominantly white neighborhoods and communities of color. Overall, borrowers in communities of color were 2.1 times more likely to receive a government-backed loan than borrowers in white neighborhoods.

The report also includes a map of Charlotte, showing the prevalence of government-backed loans overlaid with the non-white population. The correlation is stark– the areas with the highest percentage government-backed loans directly correspond with the non-white population.

This kind of ‘redlining’ necessitates intervention. The report outlines several recommendations to address this disparity and lack of access to bank loans. For example, expanding and enforcing the Community Reinvestment Act to promote investments by banks in low and moderate-income communities and communities of color is one way to address the gap. The report also calls upon the Consumer Financial Protection Bureau and other federal agencies to make fair lending a top priority, particularly in light of the reforms mandated by the Dodd-Frank Act.



Entry filed under: Banks, CDFI, Credit Unions, Housing. Tags: , , , .

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  • 1. James P. Scanlan  |  July 28, 2012 at 11:07 pm

    The described study offers no evidence that conventional lenders discriminate against minority borrowers. Government backed loans exist in order to provide financing to persons whose incomes and credit histories make them less able to secure conventional loans. Given that minorities tend to have lower incomes and weaker credit histories than whites, minority borrowers will avail themselves of such loans more often than whites. Thus, disparities of the type noted in the study will exist regardless of whether banks discriminate against minorities seeking conventional loans.

    It is true that if conventional lenders discriminate against minorities the disparities of the type identified in the report will be larger than they would be if banks did not discriminate. But one needs to have a benchmark of what those disparities would be in the absence of discrimination in order to infer that observed disparities suggest discrimination.

    Most lending disparities studies of which I am aware seem to have a number of faults, including the failure to adequately adjust for differences in characteristics of various racial and ethnic groups seeking loans. But generally such studies at least proceed with a notion that one would observe a certain pattern if no discrimination existed and then attempt to infer discrimination on the basis of departures from the pattern. The described study does not do that and hence provides no basis for inferring discrimination.

    It is the most elementary logic that if A would exist whether or not B exists, the fact that A exists provides no information as to whether B exists. That logic was ignored in this study.

  • […] problem of discrimination in mortgage lending is well documented. A report that we had previously blogged about from Reinvestment Partners and several other advocacy organizations illustrated the patterns of […]


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