Federal regulators reported yesterday that African-American homebuyers are nearly twice as likely as white applicants to get mortgages with higher interest rates, though they warned that more investigation is needed show discrimination.
The study is the Federal Reserve's first in-depth look at the role of race in a growing segment of the mortgage market that charges higher rates because the borrowers are considered at a greater risk of default. While such loans provide wider access to credit, their popularity has spawned concerns about predatory lending.
Advocacy groups and the banking industry have clashed for years over lending practices, as academics have debated the reasons why minority borrowers have substantially different experiences than whites when obtaining a home loan. New York Attorney General Eliot Spitzer was the latest figure to wade into the dispute, launching an investigation this year into whether discrimination plays a role.
Federal Reserve researchers found that after accounting for some - but not all - factors including income and the size of the loan, 15.7 percent of African-Americans got higher-priced loans on their homes last year compared to 8.7 percent for white borrowers. For Hispanics, the incidence was 11.6 percent and for American Indian and Alaska Natives it was 11.8 percent. Asian-Americans had the lowest rate of any racial group at 8.1 percent.
In its analysis of metropolitan areas, the Federal Reserve found that 9 percent of all borrowers in the Baltimore region got the higher-cost loans, compared to 11.5 percent nationally, which may reflect the state's relative affluence compared to other parts of the country. In the District of Columbia as well as its Virginia suburbs of Arlington and Alexandria, the rate was 6.4 percent.
The study is based on data from lenders who are required under the federal Home Mortgage Disclosure Act to disclose information about applicants and the home loans that they extend. Congress passed the law in 1975 amid worries that lenders weren't providing home financing to qualified applicants on reasonable terms, contributing to the decline of certain neighborhoods. The requirements have evolved, and this was the first year that lenders reported data on higher-cost loans.
Consumer advocates seized on the study as evidence that institutional bias is a factor in the lending industry.
"It's clear yet again that African-Americans and Latinos pay more for home loans than comparable white borrowers and that there are incentives in the mortgage market that makes this much more acute," said Debbie Goldstein, executive vice president of the Center for Responsible Lending, a nonprofit research and lobbyist group.
But the Federal Reserve, in its report, cautioned against drawing unfair conclusions from the data. The study's authors noted that it would be "unfortunate" if accusations of bias discouraged lenders from making the higher-priced loans. The volume of the "subprime" loan market, which charges the highest rates, has ballooned to more than $530 billion from just $35 billion a decade ago. Some economists credit the availability of the loans for increasing homeownership rates.
The Federal Reserve said it has contacted lenders that showed "relatively large pricing differences" to gather additional data and conduct interviews with current and past banking personnel and borrowers. About 2 percent of the 8,850 lenders, or about 175 institutions, had statistically significant disparities in the incidence of those loans for different racial groups.
Banking officials point out that the data don't include information about an applicant's credit risk or score, which plays a big role in determining pricing. However, the industry and regulators say that expanding the data fields that are released publicly could raise privacy issues or reveal proprietary business strategies.
"Banks lend to individuals and not to groups, and we have to be very careful when we say they are discriminating against this group," said James C. Ballentine, director of grass roots and community outreach at the American Bankers Association, a trade association in Washington. "The data itself can limit you in drawing any conclusions. It just provides additional food for regulators to chew on when looking at banks."
A number of factors influence loan pricing, including credit risk and the cost to service a loan, as borrowers with higher- interest loans are typically more delinquent in their payments. But the Fed said another factor is that loan officers or brokers are allowed to deviate from rate sheets when the market can bear it, which could lead to unlawful treatment of minority borrowers.
The researchers also said that less-sophisticated borrowers are less likely to shop around or realize that they can negotiate with the lender over the interest rate and fees. Lower-income people may fall in greater numbers into that category of borrowers, and minorities have disproportionately lower incomes, they said.
ACORN, a national community organization for low- and moderate-income families, has done an analysis of the data to be released this month and says that racial disparities are more pronounced in cities, which in years past have been at the center of allegations of redlining, or the practice of denying loans in certain areas.
"Yesterday's fight was for access to credit," said Maude Hurd, president of the group. "Today's fight is about fair pricing and terms."